Section 1: Introduction

The business environment is a term used to refer to a combination of both internal and external factors that impact on a business organisation’s operations, including its management, customers, employees, business regulations, and supply and demand (Hans, 2018, p. 48). These factors include competitors, suppliers, technological advancements, government laws and regulations, social, political, market and economic trends among others. It can be defined as a set of social, economic, legal, political, technical as well as demographic factors that are beyond an organisation’s control and that influence the organisation’s business decisions (Cherulinam, 2012, p. 48; Hans, 2018, p. 68). Given that the various environmental factors have significant effects on every aspect of a business, be it product pricing, location, nature, personnel policies, and distribution systems, understanding the business environment within which a company operates is key to successful business management. Similarly, in a complex, multifaceted and rapidly changing business environment, in-depth knowledge of the macro environment helps an organisation to identify opportunities and threats to the business, which in turn, helps business managers to adapt their strategies. The purpose of this report is to analyse the macro and microenvironment of Tesco using Porter’s Five Forces and PEST evaluation tools. Porter’s five forces assessment findings show that Tesco is operating in a highly competitive environment and has to develop new strategies to retain its market share in the retail industry. Further, the findings show that competition from traditional rivals as well as discount stores is threating to eat into Tesco’s market share. However, the retailer would promote its output by taking advantage of some of the available opportunities such as the current emphasis on healthy lifestyles by consumers. On its part, the PEST analysis findings show that various macro-environmental factors pose a serious threat to the company’s market share in the UK’s retail industry. Consequently, Tesco needs to leverage technology, diversification, and innovation to maintain its competitive advantage.

Section 2: Brief Background of Tesco PLC

Tesco PLC is a British firm that retails groceries and general merchandise. The company was started by Jack Cohen in 1919, and has risen over the years to emerge as one of the most well-established grocery retailers in the United Kingdom with a market share of over 28 per cent, and alongside Sainsbury’s, Asda and Morrison’s are ranked as one of the four largest supermarkets in the UK. Besides, Tesco was both ranked as one of the most renowned brands in the UK and the 15th most valuable retail brand globally in 2016 (Statista, 2018, n.d). Founded originally as a UK grocer, Tesco diversified into other retail areas such as clothing, furniture, software, books, toys, electronics, telecommunication and internet service subsidiaries as well as financial services. It also expanded geographically in the 1990s with its entry into nine other international markets such as India, Czech Republic, and Hungary, besides holding interests in a number of business ventures with both local and international partners (Tesco PLC, 2019, n.d). With over 6,966 different sized stores and over a half a million employees around the world in 2018, Tesco has repositioned itself as a low-cost retailer that caters for the needs of various social groups, and that provides a wide range of selections from One Stop stores to Tesco Value, Tesco Extra and Tesco Finest items. Even though the group has fully-owned retail operations in twelve countries across the globe, a majority of its revenue is concentrated in the UK and the Republic of Ireland (Tesco PLC, 2019, n.d). Also, the group holds a significant share in entertainment retail, and as a leader in adopting new technology, remains the UK’s leading online grocery retailer.

Section 3: Analysis of the Tesco PLC’s Business Micro-Environment

The Microenvironment comprises of the factors or actors in a business organisation’s immediate environment that impact on the performance of the organisation. Alternatively, the microenvironment can be described as the forces close to the firm that affects its ability to serve its customers and achieve its business goals and objectives (Hans, 2018, p. 73; Cherulinam, 2012, p. 54). These factors include competitors, customers, the public, suppliers, and marketing intermediaries. Unlike macro environmental factors, microenvironmental factors are intimately associated with the organisation, and as a result, the relative success of any company depends on how it effectively deals with these factors. For instance, a company needs a reliable source of supply for it to function smoothly. Issues of supply constraints would compel the firm to maintain a high inventory that would cause an increase in its costs of operations. Customers are also an equally crucial microenvironmental factor as they are the reason why the business exists in the first place. As such, for business success, the firm must always monitor customer sensitivity.

Porter’s Five Forces

Developed by in the late 1970s by Michael Porter, the model is a framework that is used to analyse the level of competition within a given industry. The model draws upon the industrial organisation economics to develop five main forces that help to figure out the level of competition in a given industry (Dalken 2014, p. 6; Porter 1979, p. 24; Grundy 2006, p. 215). It includes the threat of new entrants, supplier power, buyers’ power, competitiveness, and the availability of alternative commodities. The main advantage of Porter’s Five Forces model is that when used together, analysis of the forces can help to determine a business’ long-term profitability. Also, given the fact that the five forces affect market share, prices, profit margins, potential profits as well as industry volumes, business success in a given industry is critical. To this end, the model provides a framework for the analysis of the evolving dynamics of the business environment (Dalken, 2014, p. 7).

 

However, the model has several shortcomings. These include: the model only provides an analysis of an industry at some point in the past. While the information provided could be useful in developing short-term strategies, the fast-changing external factors such as technological advances and globalisation have narrowed the applicability of the insights gained from the analysis (Dalken, 2014, p. 8). On the same note, the model only provides industry information which furthers limits its applicability as a tool in analysing individual business organisations in comparison to other analysis techniques like SWOT.

Porter’s Five Forces Analysis of Tesco PLC

An analysis of the competitive environment within which Tesco operates should be undertaken using Porter’s five forces analysis to help the company find ways of gaining a competitive advantage.

3.1.1: Analysis of Rivalry Competition

There is an intense competitive rivalry in the food and grocery retail industry more especially in the United Kingdom which is the retailer’s primary market. Tesco is engaged in an incredibly intense competition with its main rivals such as Morrison’s, Waitrose, Sainsbury’s and Asda over products, prices as well as promotions. With the Tesco’s competitors offering similar products such as electronics, clothing, food items among others at a comparatively similar cost which in turn lowers product switching costs, the customers can switch from Tesco products to other products in other supermarkets without much difficulty. Product switching has significant effects on Tesco’s sales.  This has resulted in fierce price wars as well as an intensified product advertisement among the UK’s big four retailers. Additionally, discount stores such as Lidl and Aldi that give their customers up to forty per cent discounts on various products are providing major competition to the company which compelled it to develop a discount scheme to increase its sales (Christie, 2017, n.d).

3.1.2: Analysis of Supplier Power

There are many suppliers in the supermarket retail industry, and as a result, Tesco suppliers do not enjoy much bargaining power. Tesco can easily switch or replace suppliers who do not comply with its conditions and can acquire products at the lowest prices which have affected the suppliers’ profit margins.

3.1.3: Analysis of Threat of Entry

Even though there is generally a low threat of entry for the company as approximately 69 per cent of the greengrocery retail market share is owned by the so-called “Big Four” enterprises, smaller supermarkets such as Iceland, Waitrose and Aldi are engaged in intense competition to gain a larger market share. Such a market structure gives little room for new entrants to become significant players. Also, new entrants would be forced to offer much lower prices given that smaller retailers such as Lidl and Aldi are already offering up to 40 per cent discounts on various products (Josie, 2017, n.d).

3.1.4: Analysis of Buyer Power

The retailer’s customers retain a relatively high bargaining power as a result of alternative retailers such as Asda and Sainsbury’s that provide similar products at relatively similar prices. With product switching costs effectively lowered, customers have the freedom to choose from a wide range of quality products within the same price range. Besides, discount stores such as Lidl and Aldi are providing high-quality products at lower prices which have forced Tesco to slash the costs of some of its products such as vegetables and fruits to boost its sales.

3.1.5: Analysis of Threat of Substitution

The threat of substitute products is extremely high both in the grocery and non-grocery market because the retailer’s possible food and non-food products can be sourced from retailers in other sectors who can directly provide these food and non-food products to the customers. For instance, non-food retailers and departmental stores such as Debenhams, Primark as well as BHS can offer food and beverages directly to their customers on top of the other products that they offer.

Analysis of Tesco PLC’s Macro Environment

The macro environment is defined as the general or remote environment within which a company or business organisation and its forces in its microenvironment operate (Hans, 2018, p. 72; Cherulinam, 2012, p. 53).  The macro environment is also referred to as the indirect action environment since a business organisation does not regularly or directly interact with its macroenvironment. However, while companies have less control over macro environment forces, they pose threats and create business opportunities for firms. As a consequence, as Hans (2018) explains, the success of a business organisation largely depends on a company’s ability to effectively adapt to its macro environment (Hans, 2018, p. 72; Cherulinam, 2012, p. 53). The macroenvironment comprises of various components. These include the demographic, legal, political, economic and technological factors.

PEST Analysis

PEST (political, economic, social and economic factors), is an analysis framework used for the identification of changes as well as the impacts of the macro environment on a business organisation’s competitive position (Sammut-Bonnici & Galea, 2014, p. 67). However, the analysis tool or framework has variations such as PESTLE or PESTEL, that incorporates the political and legal elements, STEEPLED, which includes the analysis of demographic factors, and STEEPLE, which combines the corporate social responsibility or ethical dimension.

A PEST Analysis of Tesco PLC

PEST analysis provides an effective tool to analyse the fast evolving and volatile environment within which Tesco operates by identifying some of the macro environmental forces that have the most profound effects on the retailer’s performance.

4.1: Analysis of the Political Environment

Traditionally, government regulations have encouraged retailers to offer a mix of job opportunities that range from locally-based jobs to low-paying, centrally-located, highly skilled jobs. As a retailer, Tesco operates in the knowledge that its businesses greatly affect the employment opportunities in the areas where the retailer opens new stores. For instance, jobs in other retail sectors including traditional stores are affected as they are forced to cut down on their costs to be able to compete with Tesco. The retailer also operates in a labour-intensive industry and as a result, employs a large number of people including lower-wage individuals such as the elderly, the disabled and students. These workers represent a highly desirable workforce who provides higher levels of loyalty in an industry typified by high staff turnover. Additionally, a free flow of foreign trade following China’s admission to the World Trade Organization which removed all the existing barriers allowed Western firms such as Tesco to gain access to one of the world’s most profitable markets consisting of approximately 1.3 billion people. Through joint ventures with Anshan, Qinhuangdao and Fushan malls as a result of an agreement signed in 2009, Tesco has managed to establish its foothold in the Chinese retail industry. With over eighteen supermarkets in China in 2010 (Statista, 2018), the retailer has enjoyed steady growth in its international business segment. Tesco has also been a beneficiary of the joint promotion of free trading blocs by the UK government. The immersion often more nations into the EU in 200 also provided the retailer with further business expansion opportunities. However, the company’s expansion of its operations into twelve nations across Europe and Asia has exposed to various political risks. These include political instability, inconsistent tax rates as well as various current and proposed legislation that impede the smooth running of the company’s operations.

4.2: Analysis of the Economic Environment

The company pays close attention to the economic factors as they have a direct influence on its customers’ buying behaviours. While the UK economy is recovering from the 2008 economic recession, the government’s decision to reduce the interest rates helped to curb any further increases in unemployment. Consequently, the consumers’ spending power has been steadily increasing as consumers get more and more confident about their financial situation. However, there remain some financial uncertainties which have seen consumers opting to spend less on premium products. This has in turn affected Tesco’s sales volumes and profit margins (Statista, 2018). The positive aspect of the 2008 economic recession, however, is that more customers are choosing to eat more at home which creates opportunities for grocers such as Tesco to increase the sales. Another important factor is the high cost of labour in the UK. The annual wage bill, for instance, is an estimated GBP 4.5 billion. With the minimum wage rate going up by 4.4 per cent for employees over the age of 25 in 2018, Tesco’s operations have been affected by the upward shift that has resulted in additional costs running into millions of pounds (Tesco PLC, 2019, n.d). Several other economic factors impact the company’s operations, profits, prices, and costs. To this end, the retailer should seek to diversify further besides increasing its international market presence. It is worth noting that despite its efforts to enter new international markets, the company still depends on the UK market (Statista, 2018, n.d.) which exposes it to various economic risks in the domestic market.

4.3: Analysis of the Social Environment

An analysis of the United Kingdom’s population shows that the number of seniors is much higher than that of children. This represents a significant challenge to the company as older individuals tend to eat less as compared to young people. In addition to that, elderly individuals are less likely to visit supermarkets as compared to young people. While Tesco’s adoption of online shopping technology would help the elderly to shop more conveniently, one challenge is that internet literacy levels tend to drop among individuals over the age of 65 years (Eastmen & Iyer, 2004, p. 212). Also, the company regards smaller deliveries as costly and ineffective. Customer shopping trends are also changing with time. People nowadays have less flexible schedules, and as a result, prefer fast delivery and one-stop shopping. Given the company’s dependence on UK consumers, it must not only understand these new realities but also develop solutions aimed at meeting the needs of its customers. It is also important to note that consumer attitudes and beliefs affect products demand. Consumers are becoming increasingly aware of health issues such as obesity. As such, the company must review its stocking of organic food products.

4.4: Analysis of the Technological Environment

Following issues such as the horsemeat scandal and poor customer service that affected the company a few years ago, advances in technology provided Tesco with new avenues to regain its customers’ trust. For instance, the company introduced the RFID technology, which automatically counts all the stock and deducts an item from the stock after it is sold, as a measure of increasing its customers’ in-store experience. Tesco also came up with its own online mobile payment system known as PayQwid that allows customers to make payments with ease (Tesco, 2019, n.d.). However, the company’s management should be cautious as disruptive technologies such as such as e-grocers that disrupted the supermarket retail segment (Wessel & Christensen 2012, p. 60).

Conclusion

This report has analysed both the micro and macro environments within which Tesco PLC operates. Trading as Tesco, the company rose from a vegetable stall in 1919 to be the largest supermarket company in the United Kingdom with a market share of about 28 per cent, and together with Morrison, Asda and Sainsbury’s, make up the UK’s Big Four. According to the findings of PEST analysis, various political factors such as Brexit have not only affected food prices but also the devaluation of the sterling pound making it more expensive for food retailers such as Tesco to import food. Similarly, rising inflation coupled with slow wage growth has led to reduced consumer spending further affecting Tesco’s sales.

Further, the proposed Asda-Sainsbury’s merger would see the company lose its status as the UK’s biggest supermarket. The Porter’s five forces analysis findings also showed that with competition from Tesco’s traditional rivals set to heighten, and the entry of discount stores such as Lidl and Aldi, the company needs to take some measures to retain its market share as well as its long-term profitability. Some of these measures would include seeking more partnerships both locally and internationally, further diversification of its retail products, adopting a more service-oriented approach in addition to building a larger customer base by reducing the buyers’ bargaining power. The company should also streamline its production and sales processes, establish an efficient supply chain, develop new products and services, and build capacities by investing in innovation and new product development. The good news for the company is that it is adequately equipped to deal with the challenges of price competition, and its decision to acquire wholesaler Booker Group will help to promote the company’s revenue, buying power and cost synergies.

 

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