Porter’s Value Chain
Introduction Tesco is ranked as one of the largest food retailers worldwide with revenue of more than 54 billion Euros and employing more than 450 thousand employees. According to Citigroup Global Markets (2012), the company operates about 4300 store in the 14 nations worldwide. The primary region where the company has major operations includes Europe, the United States of America and Asia.
The headquarters of Tesco are in Hertfordshire, UK. According to Silverthorne (2010), Tesco’s commercial network portfolio comprises: about 170 Metro stores that sell various food products; over 950 Express stores that sell different food products like fresh foods; and about 450 Superstores that sell both non-food and food products like DVDs and books. The company also offers online retailing services via their commercial websites known as Tesco Direct and Tesco. Com. Moreover, according to Tesco (2012), Tesco offers financial services via Tesco Personal Finance, and broadband internet connections.
Since its establishment, the company has emerged to become UK’s market leader in food retail fragment. In this regard, this paper discusses the various competitive advantages of Tesco, how the company uses its core strengths to develop international business, and why it has succeeded in Asia but not in the US. Porter’s Value Chain Walker (2012) defines value chain as a relationship between major value-adding activities and their interface with the support activities. Citigroup Global Markets (2012) mentions that value chains have been implied as a strategic assessment approach deployed for differentiating the strengths and weaknesses in value adding activities. The diagram below represents Tesco’s value chain. From the diagram, the primary competitive advantages include inbound logistics, operations, outbound logistics, marketing and sales, and service.
The support activities of Tesco include procurement, technology development, human resource management and firm infrastructure. Tesco’s general cost leadership strategic management is evident in its both lean and agile inbound logistics activity. Drawing upon Walker (2012), Tesco deploys its economies of scope and its leading market position as the major bargaining powers in order to attain low costs from its raw material suppliers. Silverthorne (2010) and Walker (2012), in their analysis, have mentioned that Tesco regularly upgrades its ordering system, and approves its vendor lists and in-store activities in order to induce efficiency and effectiveness into its inbound logistic operations. Concerning outbound logistics, the company holds a leadership position in both offline and online retail food segment. According to Citigroup Global Markets (2012), the company’s leadership position is due to its effective and efficient outbound logistics.
Basing upon the arguments of Silverthorne (2010), Tesco has launched various store formats that are strategically positioned to attain full customer exposure. Some of the store formats launched by Tesco include the above-mentioned Metro, Express, Superstores, Homeplus and Extra. In addition, these store formats are segmented based on the target population. In relation to operations management, the company has been popular for its efficient deployment of IT systems in the management of the various supply chains. The IT system also significantly facilitates low cost leadership strategy.
Walker (2012) pointed out that the organization has invested more than 76 million Euros in rationalization its operations via the Tesco Digital Program. The program is solution to a third generation Enterprise Resource Planning (ERP) to the company. According to itigroup Global Markets (2012), during 2009, the company attained 550 million Euros in increased profitability because of the integration of the Tesco Digital Program. According to Tesco (2012), the program has also enabled the decrement of stock holdings within the organization. In relation to marketing and sales processes, loyalty programs such as Tesco Club card are being integrated into the company operations via advances in information technology. The Tesco Club card discourages customers from switching to the company’s competitors.
The company also launched its Greener Living Scheme to advise customers on environmental issues relating to how to reduce their carbon footprint and food waste when preparing meals (Couch 2007). Finally, Tesco has a competitive advantage resulting from the importance placed on customer service. According to Tesco (2012), the company has been using their resources in adopting a dual strategy of cost differentiation and leadership that has resulted in efficient customer service. Based on Silverthorne’s (2010) arguments, the dual strategy is evident via the development of financial services, self-service kiosks and focused promotions and direct marketing. It is imperative to note that despite the company’s cost leadership strategy, it has been capable of creating a higher level of value than its key competitors create.
Tesco’s Competencies and International GrowthThe first competency of Tesco that has enabled it to develop an international leadership is great leadership. According to Tesco (2012), leadership is at the core of any business that seeks prosperity. Tesco like other successful international companies enjoys leadership from one of the best leaders in the retail world. According to Walker (2012), the company’s Chief Executive Officers have nailed the operations of the business with an eye-catching precession. Tesco (2012) even cites that Terry Leahy, CEO since 1997, did not make business mistakes in the last decade.
The great leadership has further established the company as an international company with constantly record-breaking profits. The second competency of the company is its buying power. According to Citigroup Global Markets (2012), Tesco could not have attained the market leader position in Britain within the time span it did without acquiring other retailers. The company exhibited its expansionary enthusiasm early on by acquiring other competitor shops. Tesco (2012) pointed out that these acquisitions with the company’s strategy significantly helped Tesco to outperform Sainsbury as the largest food retailer in the UK in 1995.
Having acquired the market leader position and being the leading player in the retail market, the company has the potential and opportunity to purchase stores that seem to be deteriorating because of the present economic downturn. Being the leading player in the UK retail market, Tesco has the potential to expand in Britain and in other nations where it has not acquired a strong presence. The company’s good strategy presents another competency that seems to drive the organization to international heights. The company has a consistent and well-established strategy that facilitates growths (Couch 2007). The strategy along with their business model allows Tesco to fortify its primary business and carry out expansion activities into new markets. The company’s rationale for the strategy and business model is to widen the business scope to facilitate it to provide strong and viable long-term growth by pursuing customers in the large and expanding markets such as non-food, financial services, and telecoms and emerging markets abroad.
Other strengths include conssumer confidence and multi-format stores. Consumers of Tesco products are satisfied they get the value for their money. According to Tesco (2012), the company guarantees this by Club card scheme, Price check survey and the wide range of products it offers. The multi-format retail stores offer the consumers the expediency. Why Tesco Failed in the US but Succeeded in Asia The first reason is that the US is an strangely cluttered and competitive market. It is very difficult to succeed in the US market without having a clear and maintainable point of differentiation (Couch 2007).
As much as successful retailers are growing internationally, the odds are long. For instance, both Marks & Spencer and Sainsbury’s of the United Kingdom have withdrawn their business from the US market. Similarly, Wal-Mart failed terribly in Germany. The company’s worldwide ventures have previously been successful, except for Japan. According to Citigroup Global Markets (2012), the company succeeded in other Asian countries because they intelligently chose to focus on emerging and fast-growing economies in this region.
The US is different from these economies in that it has many competitors as compared to emerging markets of Southeast Asia. The company’s modus operandi has venturing jointly with local retailers, and acquiring good store locations. Missed targets and mounting losses is cause Tesco to fail. Tesco had said that trading losses would decrease each year and the business would become profitable in the third year of operation. Nevertheless, Fresh & Easy still experienced significant trading losses in its fifth year of business operation.
The optimistic outlook of the management was extremely to evaluate, especially when the company did not have information concerning operating expenses and cost of sales. The company also pushed back the date by which Fresh & Easy would stop making losses. The timeframe of the company to break even was even moved from the fiscal year 2012/13 to the fiscal year of 2013/14(Couch 2007).Repeatedly and revised strategy made Tesco’s operations to fail in the US. The company had sought to invent a new model with Fresh & Easy.
However, as the company’s losses increased, it deviated from one strategy to another. Initially, the company used the “Every Day Low Price” strategy before switching to issuing heavy discounts through promotions and coupons to attract customers. The company misjudged various important aspects of its products despite researching into the American consumer. For instance, it was until 2009 that the company increased the pack size to be more suitable for American consumers. Conclusion Value chain refers to the relationship between major value-adding activities and their interface with the support activities. The primary competitive advantages of Tesco include inbound logistics, operations, outbound logistics, marketing and sales, and service.
Tesco deploys its economies of scope and its leading market position as the major bargaining powers in order to attain low costs from its raw material suppliers. The company’s leadership position is due to its effective and efficient outbound logistics. In relation to marketing and sales processes, loyalty programs such as Tesco Club card are being integrated into the company operations via advances in information technology. Tesco, like other successful international companies, enjoys leadership from one of the best leaders in the retail world. The company’s good strategy presents another competency that seems to drive the organization to international heights.
The major reason is that the US is an unusually cluttered and competitive market.
