Q1a. From the information contained in the case study above, conduct an analysis of Tesco’s external environment using the STEEPLE model. Your analysis should cover and identify each of the factors as they relate to the case study. (16 marks)
The external environment of a business can be evaluated using a STEEPLE model, which incorporates seven external factors; sociological, technological, economic, environmental, political, legal and ethical (Block 1, Reading 5, p. 34). Here is a brief analysis of Tesco according to the STEEPLE model;
Sociological factors
The variety of business in the UK and across the world is going through drastic changes. One way to explain the competition eating at Tesco’s profits is the primary sociological factor that drives people to buy. When a store offers a recognized brand at a discount peoples’ expectations change. When they are happy to get a quality product at less price (say from Tesco) they tend to ignore or lower their expectation of customer care.
Tesco on the other hand, does not compete with Lidl or Aldi based on discount. Hence, it needs to pay attention to customer services more than hard discounters. Despite the additional feature of better shopping experience, people prefer ‘price and quality’ over customer service. For this reason, discounters will acquire one-fifth of European grocery market by 2017.
As a suggestion diversity can be helpful for Tesco when it comes to competition. When companies hire people of different ethnicities and cultural backgrounds they bring in creativity (Block 1, Reading 5, p. 34). In other words, if Tesco would like to compete against the super discount stores in countries outside the UK it would probably be better to hire local talent that would better target the customers.
Technological
Regardless of the similarity in the nature of trade there are subtle differences between Tesco and the hard discounters. Information and communications technology (ICT) can play a crucial role in the competition. The other discount stores mentioned in the case generally stock fewer than 2000 products.
Their ICT setup is much simpler, they have less products to manage, which makes information sharing much easier and in a timely fashion. This fact also acts as a buffer against the ‘bull whip effect’. Tesco on the other hand does not have this luxury and generally stacks more products than discount stores.
Stacking more products where the majority of products are manufacturer’s advertised makes Tesco more dependent on the supplier. Tesco also has to capitalize on timely advertisements for special promotions and discount offers. Technology is helpful indeed but it does not completely solve the problem of overstocking or understocking.
Economic
An increasing number of shareholders are becoming interested in the company’s economic performance (Block 1, Reading 5, p. 41). This was and still is a major concern for Tesco. The company overstated its bleak profits and as a result it lost the shareholder’s trust. The company’s stock price dropped by 15% since the news of fraud surfaced.
Tesco is already in a difficult situation due to its accounting fraud and the economic factors have made it worse. From the US to Australia, there are plenty of discount stores such as Lidl and Aldi, which provide quality products at very chap rates. Tesco does not have the required setup to compete with them in a price-war. Financial projections suggest that the dominance of discount stores will continue to grow.
Penny Markt of Germany and Dia in Spain have shown their market strength. Forecasts propose that such discount stores will grow at 4.8% annually in Europe till 2017. This sociological trend of preferring discount stores is not confined to a single geographical region. In fact, wherever such stores had not pre-existed they are finding popularity more rapidly than established units.
Environmental
Political
Tesco is in financial trouble because of the political repercussions of committing a fraud. The political system in which an organization conducts its businesses largely dictates its operations (Block 1, Reading 5, p. 42). Book keeping is a very sensitive topic and misrepresentation of financial information can do maximum damage to a company. Legislations dictate many aspects of business activities (Block 1, Reading 5, p. 42). Tesco is in hot waters due to an alleged financial fraud, it depends on many political factors as to how the company will pay for its shortcomings. For instance, was it a mistake or a collective effort of Tesco’s board of directors?
Legal
Tesco has violated the rules of financial book keeping while operating under the UK GAAP and UK Company law. It shown inflated bogus profits on its books. When this news came out, its stock slumped 15% amidst fears of legal action against the company. The UK Government also plays a role as it directly intervenes in corporate legal matters. Government is a major party in many business transactions (Block 1, Reading 5, p. 42)
Ethical
There is no denying that Tesco has committed an ethical crime. They have misrepresented their profits. Legalities aside, it does not sit well with the shareholders and with the customers. Such actions loose trust and loyalty of customers. Tesco could potentially get back its market share while remaining within the boundaries of ethics.
Recently increasing numbers of questions regarding ethical practices of business have been finding voices. The unethical practices of Enron and WorldCom, the financial crisis of 2008 and the matter of health and food safety have spooked the customers (Block 1, Reading 5, p. 44). Even though showing inflated profits on the books does not necessarily affect the quality of good sitting on Tesco’s shelves, but it does hinder the potential investors from putting their money in the company. This fact certainly hampers the reach and growth of the company.
There is nothing unethical in ‘piling high and selling cheap’, which was the vision on which Tesco was founded. Other discounters are stealing its market share because Tesco is not following its own primary guideline.
Q1b. Based on your STEEPLE analysis in Q1a, what two issues do you think Tesco need to pay most attention to and why? (4 marks) (Total for Question 1: 20 marks)
The two major issues that Tesco needs to pay attention to are the legal and ethical. Both are connected and therefore, makes them easier to handle. First, they need to adhere to the proper accounting law and guidelines to not step out of the legal premises such as misrepresenting profits. Second, the company should adhere to the highest standards of ethics and professionalism regarding financial statements. There are many grey areas in accounting and presentation of financial information. It depends on the best and ethical judgement in formulating financial ratios and figures that determine how well they represent a company’s financial standing. This will also help in regaining the trust of the investors that has been shaken by the recent events.
Q2. What do Tesco believe will motivate people to work for them? Use the information above and two theories of motivation from Reading 12 to help you answer this question. (20 marks)
The two motivational theories relevant to the case are Maslow’s hierarchy of needs and McGregor’s theory X and theory Y.
Maslow’s hierarchy of needs is a popular way to understand employee motivation as it breaks down many complex factors into simple ‘layers’; self-actualization, esteem, belonging, safety and physiology (Block 2, Reading 12, p. 9). The leadership skills mentioned by Tesco check many of these motivational elements. For instance, ‘collaboration’ is the top most leadership skills mentioned by the company, which satisfies esteem.
Also, the definition of collaboration mentioned by the company states that they ‘trust’ their employees, which would also help in giving them a sense of achievement and respect. Although, the given information does not shed light on the matter of job security however, it can be assumed that a company operating at a level of Tesco will be vigilant in providing sufficient safety and stability, which satisfies another layer of motivation on the Maslow’s hierarchy of needs.
In certain cases the more recognized the company is the better the job security. People generally assume that a big name with considerable brand loyalty must be taking good care of its employees. Their pay checks arrive on time and the salaries will be competitive. The motivational factor regarding big companies is that if they are mistreated as an employee they can drag the company in litigation and legal matters. Therefore, such companies go out of way to avoid such difficult situations for themselves.
Tesco is a customer oriented retailer. It is at their heart of business that customer is satisfied. For any business, this has to be the key as they pay money to buy things, which generates income and makes pay checks possible. The second most important key in their organization is their people or their employees.
This works directly in conjunction with the common motivational theories. For instance the managerial interest in motivation emphasizes on non-financial aspects as well. The Human Relations School proposed that people seek other means of satisfy their needs besides the financial (Block 2, Reading 12, p. 6). Hence, when the employees at Tesco feel a sense of involvement in the system, it motivates them. This can be further elaborated through McGregor’s theories.
McGregor’s theory X and theory Y fits into Tesco’s motivational model. McGregor contrasted two major approaches to motivation; X is where the pure motivation is achieved through financial means, and Y targets the ‘high order needs’ that relate with esteem and self-development (Block 2, Reading 12, p. 10). In Tesco’s case theory Y appears to be more dominant as the leadership values that the company seeks relies on factors such as empathy, innovation, resilience and responsiveness.
The company makes it easier for the employees to understand that they are included in the process. The business is about taking care of customers, giving them what they need with ease. The projected environment is friendly hence, the potential employees should understand that the company culture is to make the customer feel at home, as if they are hanging out with their friends.
This also helps the applicants in two ways; 1) they know exactly what Tesco expects of them as the requirements are clear and; 2) the friendly environment that is not entangled in corporate paper work, it is result oriented, which is an added feature that should encourage them to apply.
Q4. Judging by the information given in the case study, and drawing on B100 Block 4 module concepts, how is the marketing mix of discount grocery retailers such as Aldi and Lidl different from the marketing mix used by Tesco? How should Tesco change their marketing mix in order to counter the competition from the discounters? (20 marks)
Marketing mix refers to tactical methods used by a company to compete in the market (Block 4, Reading 31, p. 43). 4P’s of marketing mix can serve as tools to evaluate a company’s marketing strategy; product, price, placement and promotion. Today the concepts are more commonly described with other words, for instance, promotion refers to all the operations of the marketing communication.
The basic layout of Tesco’s marketing mix is that it relies on the first ‘p’ (product) to sell itself. The advertisement or promotion of the product has already been done by the manufacturer of the product. Tesco’s job is to make the product readily available for the customer on its shelves. The initial plan, as mentioned in the case, was to stock more products to sell them cheap but that strategy has been long forgotten.
Tesco therefore, relies more on promotions and discounts offered by the manufacturer. This makes the retailer dependent on the manufacturer’s marketing tactics that impact Tesco’s sales. There is not much variation in the ‘price’ section of the marketing mix since the retailer is not selling huge volumes of products that enable it to vary the price. In the current circumstances if Tesco drops price of products to increase sales it will only be temporary, which might also hurt its profits.
In such marketing mix, the most important ‘p’ of the marketing mix is placement. Placement has its own limitations as there can only be so many physical stores. Opening more stores in other countries will require additional capital and adherence to their regional laws. At the moment, the company’s share price is not doing well, which makes it extremely difficult to capitalize on placement.
Aldi and Lidl have a different approach to their marketing mix. Both of these are hard discounters and keep a limited manageable stock at hand. Generally they have under 2000 products which they sell at discount. Also, their placement strategy is working well for them as the regions that did not have discount stores before are flocking towards these stores.
An intermediary buys from producers and sells it to consumers for a profit (Block 4, Reading 32, p. 54). Tesco is primarily an intermediary and Aldi and Lidl directly provide goods to consumers. All retailers might appear to deal in tangible products. The fact is that all three offer tangible and intangible products to the customers. Tesco’s marketing mix might not have a direct emphasis on promotion since Tesco does not sell its own range of products, however, it still needs to ‘serve’ the customer.
Tesco wants to hire service oriented people that can truly make the customers feel at home. It is a form of promotional service that they offer along with products. Often marketing communications are expensive (Block 4, Reading 33, p. 67). By offering better customer experience the business is promoting its brand. The customer would want to shop at Tesco not only for popular products at reasonable prices but the services and experience that they get at their outlets.
If the staff at Tesco deals with customers that make them want to return to the outlet it is a form of successful service. It helps in customer retention and in spreading word of mouth. The reason for not mentioning it directly in promotion of the marketing mix is that certain types of services are not even noticed by the customers. A hair stylist providing hair styling tips is an example of such service, which also create a deeper connection with the customer (Block 4, Reading 31, p. 46).
A suggestion for Tesco is to offer the ‘three’ levels of products to the customer. It can be complicated to achieve in certain cases considering that Tesco is not a manufacturer. However, if Tesco can deliver these services wherever they can it would help their sales and generate precious revenue. The product benefits can be classified into three categories for marketing mix (Block 4, Reading 31, p. 46). Tesco can sell the ‘core product’ (which Aldi and Lidl are also doing), ‘actual product’ (such as offering phone cases or trendy ‘stick-on’ with the sale of phones) and the ‘augmented product’ (after sale services).
Q5. Drawing on the information reported in the case study, discuss which market structure best describes the grocery market. Then discuss the implications of this market structure for (a) Tesco and (b) consumers in the grocery market. (20 marks)
Market structure refers to the setting or the business environment in which the buying and selling takes place (Block 5, Reading 42, p. 78). Different industries have different market structures. Also, it depends on the geography, social factors, demand-supply, and government policies as to the type of market structure. The four main types of market structures are; monopolistic competition, perfect competition, monopoly and oligopoly.
The grocery market in the UK has oligopolistic structure. An oligopoly market exists where a few firm dominate it (Block 5, Reading 42, p. 88). The UK grocery market is dominated by a few companies such as Tesco, Aldi, Morrison, Asda and Lidl etc. Tesco is the major player with the biggest market share. Even though the firms compete against each other for market share however, there is some form of collusion among them where the retailers set minimum prices to safeguard their profits.
As mentioned in the case what Aldi and Lidl are doing is affecting Tesco’s market share directly. This is what differentiates oligopoly from monopolistic competition; the firms inter-depend. The collusion in this case is to the minimum, the firms compete against each other to the end. The major tool of competition among the firms is promotion.
When a firm gives discount on a product that is also sitting on the shelf of the competing firm, it is competing against it. This aspect of competition is apparent in grocery market in the UK. In comparison, Tesco holds a major market share, hence, smaller companies such as Aldi and Lidl offer promotions such as discounts to attract Tesco’s customers.
It must be mentioned that Lidl and Aldi do not offer products on low prices by lowering the quality. Same product or brand is available at Tesco at a higher price. The reason why Tesco is still enjoying a bigger market share is because of its huge number of stores across the country. The products are readily available, referring to placement to compete.
In oligopoly there are certain limits to which a retailer can drop its price. It has been observed that the decline in income has squeezed the profits of grocery market in the UK. There is a strategy of lowering prices to sell more but it takes a toll on the company profits. Oligopoly does not guarantee the safety of profits of large firms.
For instance, in Britain there are no hard restrictions on anyone that wants to compete with Tesco and its peers. It means that despite having a dominant market share it faces threats. These threats are from the new comers as well, especially those that can take away chunks of business through online shopping websites.
Oligopoly affects the buyers and sellers in many ways. First, the customers do not have many options since the number of retailers is limited. Second, they need to conduct cost-benefit analysis in many cases. For instance, when Aldi and Lidl offer discounts the customer needs to calculate if they have to travel farther to get the products cheap or buy from Tesco which is probably nearby.
Q6a. Using information in the case study and the extract above as well as concepts from Reading 47, what are the corporate social responsibilities of Tesco? (your answer should make reference to economic, legal, ethical and philanthropic responsibilities)
Corporate social responsibility (CSR) refers to common business guidelines governed by ethics that are over and above the law (Block 6, Reading 47, p. 17). These guidelines give direction to businesses to set their corporate responsibilities and business practices.
There is a price war in progress, where competitors are stealing customers away from each other. This trend has led to malpractice in the food department. As mentioned, some irregularities have been identified. Tesco is the leading brand in grocery market and bears significant responsibility in providing quality food to the people.
Legal view of this situation is grim for Tesco. By serving burgers containing horse meat the store has violated the laws of food and safety. In certain cases the law holds the right to cancel the license of selling meat or food items altogether.
It is difficult to evaluate the philanthropic perspective for Tesco considering the tough financial turmoil it faces. At the moment it is already facing backlash for misrepresenting the financial information. Moreover, ‘cutting corners’ when it comes to providing healthy food items is a crime that spooks the consumers. It needs to be a decision from the finance department how much budget they can allocate for philanthropy.
In spending money to take care of people, they can offer the same food items with the best quality at low prices. These promotional methods will help create a positive image of the brand as well as offer philanthropic services to the society.
Q6b. Of those corporate social responsibilities you identify in Q6a, which do you think is the most important and why? (5 marks)
The most important social responsibility for Tesco is to respect the law. Litigation or accusations of breaking law can be devastating for the company. All the remaining factors come in later. There can be no economic prosperity or philanthropy if they are on the wrong side of the law. At the moment, they are in business only because the company exploited some situations that were initially overlooked by the law.
Later when the company had to pull its ‘value’ burger lines because it contained 29% horse meat. Such instances do not only inflict a financial blowback but also scare the customer from buying again from that place. It must be noted that business is not just an entity, in the eyes of the law, it is considered a “kind” person (Block 6, Reading 47, p. 20). They have legal obligations the same way as other people do.
