Introduction

For this essay, the business I will describe, analyse and evaluate (involving PESTEL analysis,
SWOT analysis and Porter’s Five Forces Model) is Tesco; an international general product and
grocery retailer who are the current leading business of the UK supermarket industry with a
market share of 28% (according to: McKevitt, 2017).

Although, the supermarket industry is commonly described as oligopolistic due to three other
influential grocers: Asda, Sainsbury’s and Morrisons. However, (according to: McKevitt, 2017)
Tesco’s closest rival, Asda has a market share of just over 15%. Which suggests Tesco might fit
more appropriately in the monopoly category. (According to: Economicsonline.co.uk, 2017) A
monopoly will obtain 25% or more market share. Such an amount of power within a market can
lead to abilities such as price setting and complete maximisation of economies of scale.

The Tesco brand has always involved low pricing in order to draw in customers and retain
market share, however in recent years low-price supermarkets including Lidl and Aldi have
gained popularity and perhaps have taken over the low-income market segment. Resulting in
the development of Tesco’s more recent strategic efforts. Tesco’s Annual Report and Financial
Statements (2017 - Pages 7 to 10) Outline six ‘strategic drivers’ which shape their overall
business strategy. One is ‘Differentiation’. It is expressed Tesco are trying to diversify from other
brands through both product and services by offering good quality with affordable prices. This
could be acknowledged as Tesco responding to the lesser quality offered from low-price
competitors like Aldi.
Aside from pricing, competitors such as Waitrose and Ocado offer higher quality products at a
higher price. So, by offering significantly better quality products than the low-price competitors
and lower prices than the ‘premium’ (high quality) competitors, Tesco may be able to effectively
maximise sales.
In addition to pricing and quality control, It is mentioned within the annual report that
differentiation will be enhanced through the service of online shopping/home delivery (of which
is not offered from the low-priced competitors - acting as a strong attraction) and ensuring great
service is provided in store.
Interestingly, another one of the six ‘strategic drivers’ involves the strive towards increased
leasing and internal utilisation of unused space and increasing concessions. This drive is
essentially an attempt to increase efficiency relating to physical space in property owned.
Relating to concessions; Tesco is already in contract with the Arcadia Group and Holland and
Barrett. Further progression may enhance Tesco’s brand image as the mentioned organisations
currently uphold strong reputations. Such concessions supply greater attraction and diversity for
the Tesco store experience.
With the previous points mentioned, in relation to Porter’s Generic Competitive Strategy Model
(Porter, 1981) It could be argued Tesco transitioned from ‘cost leadership (which involves
minimizing costs in order for prices to be reduced without disrupting the profit margin) to
‘differentiation’ (which involves offering an aspect of uniqueness).
Tesco obtains a tall organisational structure. This means that there are multiple layers of
hierarchy involving various levels of management, where managers will each hold spans of
control. At Tesco, the Board sit at the top of the structure. Below sits the current CEO Dave
Lewis who leads a small team of executive members. Regional managers are responsible for
certain geographical areas of operation. Below the regional managers are managers for every
single Tesco store, who will lead a team of managers responsible for various management
duties such as food trading and personnel. Tesco’s organisational structure is tall as spans of
control of managers are relatively small, therefore close supervision of subordinates can be
achieved. However, Communication coming from the top of the hierarchy can be slow due to all
the layers of management, therefore making an organisation slower and increased chance of
opportunity costs.

Main body
PESTEL analysis is a framework acronym used to analyse external influences upon a business.

Political
With the UK in a situation of uncertainty with the action of brexit due to the departure of free
trade (including capital, labour and goods), Tesco may face a range of adversities as a result of
this occurrence. Firstly, imports. Without being a part of the European Union, Tesco will no
longer gain benefit from free trade, firstly being import charges. Tesco is a worldwide
organisation with over 6,800 stores in the UK, Europe and Asia (Tesco 2017) with a large
complex supply chain involving international transportation of products. This means that
tremendous additional costs will be attributed to Tesco’s operations involving stock leaving and
entering the Europe. This will adversely affect its financial position as costs will increase,
reducing profit margins.
In order to prepare for future costs rising, Tesco’s human resources may have to make cuts.
This may include salary reductions and redundancies. Salary reductions are a unpreferable
option, however, if brexit implications seriously affect Tesco, They may have to reduce costs in
every way possible in order to remain competitive in the market. If costs cannot be balanced,
Tesco will be forced to raise prices and potentially give up market share. A step further would be
redundancies. Both of these human resource activities will reduce costs as wage costs will be
reduced. However, both activities will seriously demotivate the employees (even if they were not
personally affected, it may create fear and internal conflict) which subsequently will lower
motivation. Less motivation results in a less productive workforce which will affect the overall
performance of Tesco stores. If Tesco is forced to make such HR occurrences, non-financial
motivation should be used to improve the morale of staff. Mayo, 1949 is one of many studies
showing success of non-financial motivation. This study in particular suggested personal
attention from superiors and team working encourages increased productivity. Therefore, in a
time when employees are experiencing negativity (like pay cuts and redundancy speculation), it
would be wise to utilize non-financial motivational methodology. Points mentioned highlight the
ability human resource management have that can influence how a business responds to
adversity.
Economical
Another aspect of the brexit adversity is inflation. Worstall (2017) from Forbes.com Reported
that the increase of costs in imports has caused the pound sterling to decrease in value. As a
result of this came the demand of increased prices from Tesco’s suppliers. In 2016, Unilever (a
key supplier responsible for Marmite and Ben & Jerry’s) started conflicting negotiations with
Tesco and temporarily halted their supply. This situation has since been solved and they
continue to do business together. However, shelves were empty for a few weeks in many Tesco
stores, resulting in a loss of sales. This is one example of the economic climate negatively
affecting Tesco.
The rise in inflation and devalue of the sterling will cause imports to become more expensive as
the climate progresses. Throughout 2016 and 2017, Tesco struggled to keep pricing as their
strategy would prefer. Wood (2017) reported Tesco successfully cooperated with key suppliers
in order to keep prices low to benefit Tesco customers. This can relate to Porter (1980)’s ‘Five
Forces Model’ which describes five competition based external forces. In this case, Tesco
demonstrated a strong bargaining power over their suppliers, which was done in order to benefit
the customers of the UK. This shows strong corporate social responsibility and highlights the
importance of operations management activities.

Social
In recent years, Tesco have adapted in order to meet needs of their customers. One major
example of this is the progression of ‘Tesco Express’ convenience stores. This came as a result
of today's customers performing less large ‘bulk’ purchases, and smaller but more frequent
purchases. In addition to this, for many customers superstores are a tedious experience due to
the walking distance required inside them. Tesco Expresses diminish these problems. This
adaptation may have involved significant human resource and financial implications. New stores
require expenditure, as well as recruitment and training which cost time and opportunity.
However, this adaptation to a variety of social demands may be deemed as a successful one,
therefore worth the costs involved.

Technological
In today's environment, innovation is a constantly producing new technology. Such technology
can influence a businesses activities. For Tesco, a recent technological innovation causing
change is self-serving checkout machines (technology that allows a customer to serve pay for
products with no staff member interaction). This technology eases the demand for staff in peak
times, allowing queues to be reduced in-store; greatening customer experience. However, such
technology comes with high investment costs, as well as maintenance and training for staff to
effectively use it. Staff are required to know how to assist customers if they feel confused, and
deal with any malfunctions that may occur with the system, which may give an opportunity for
job enrichment. However, these machines can demotivate employees as it is possible that some
staff working hours may be reduced due to the capability of the self-checkout machines,
potentially creating a demotivated workforce. This may also relate to the wider topic of
technological threat to employee job security.
As mentioned, new technology has significant financial costs. But such technology is vital to
market leading businesses like Tesco, as every competitive edge can lead to a ripple of benefits
throughout the business. Therefore, businesses are willing to pay the costs.
Tesco has expressed its drive to reduce costs. But obsolescence is a conflictor. Pressure may
be put onto the finance department, perhaps forcing changes to budgeting to be restricted, this
would have an adverse effect on the rest of the functional areas as less capital can be spent on
things like marketing and employee bonuses.
Another technology worth discussing is Just In Time (JIT) replenishment management, which
involves a system linking sales to stock replenishment system, allowing for items sold, to be
immediately replenished, rather than a manual acknowledgement. This is a another strong
example of technological advancements benefitting tesco in becoming increasingly efficient.

Ethical
Previously Tesco has been surrounded in controversy, including the ‘Horse meat scandal’ as
well as overstating profits in 2015. In their annual report of 2017, it is highlighted “25 million
Meals donated through our food surplus redistribution work and Neighbourhood Food
Collection”. This is within a range of other positive social and ethical efforts aiming to build up
Tesco’s brand image. By enhancing its reputation, loyalty will be enhanced between customers
and suppliers.

Legislation
Laws enforced by the UK government have heavily impacted Tesco in the past and present. For
example Mintel Report (2004) stated that laws have restricted the amount of power a strong
organization can impose over suppliers. Such laws disallow unarranged changes to pricing. By
restricting such power, gives Tesco less control and allows for less barriers to entry into the
market. Another example is the usage of predatory pricing. It is often considered unethical to
undercut pricing aggressively, however in order to legally comply with competition law, Tesco
undercuts on fuel pricing, but rises prices of in-store items. This shows significant efforts being
made to remain legally abiding.

Conclusion
In summary, the PESTEL analysis of Tesco has outlined Tesco’s great ability to react to
external influences mentioned. Such reactivity allows them to remain at the top of their market.
SWOT analysis on Tesco would highlight strengths being adaptability, obtaining a wide product
and service portfolio and an efficient organisational structure. However, weaknesses may sway
towards corporate social responsibility due to unethical occurences in the past. This certainly
damaged the Tesco brand. Opportunities for Tesco are endless, as they generate billions of
revenue per annum. This amount of capital offers many investment and development
opportunities. However they are not always successful, evidenced by Tesco’s failure to enter
the USA market in the past. Threats to Tesco have been identified greatly in PESTEL. One
major being, competitors. Although leading the market, rivals such as Asda, Lidl and Aldi are
growing market share and often beat Tesco pricing.
With this being said, the main implication of my findings has to be the alarming significance and
threat of the developing external influences surrounding Tesco, especially the present and
future economic climate of the UK.

References
Annual Report and Financial Statements 2017. (2017). [ebook] Tesco PLC, p.7. Available at:
https://www.tescoplc.com/media/392373/68336_tesco_ar_digital_interactive_250417.pdf
[Accessed 01 Jan. 2018].

Economicsonline.co.uk. (2017). The theory of monopoly. [online] Available at:

http://www.economicsonline.co.uk/Business_economics/Monopoly.php [Accessed 02 Jan.
2018].

Mayo, E. (1949). Hawthorne and the Western Electric Company, The Social Problems of an
Industrial Civilisation. Routledge.

McKevitt, F. (2017). Lidl becomes the UK�s seventh largest supermarket - English - Kantar
Worldpanel. [online] Kantarworldpanel.com. Available at:
https://www.kantarworldpanel.com/en/PR/Lidl-becomes-the-UKs-seventh-largest-supermarket
[Accessed 10 Jan. 2018].

Mintel Report (2004). Food retailing - UK. Retail Intelligence.

Porter, M. (1980). Competitive Strategy. Free Press, New York.

Porter, M. (1981). Competitive strategy, Michael E. Porter, The Free Press, New York, 1980.
No. of pages: 396. Price: $15.95. Strategic Management Journal, 2(1), pp.93-95.

Wood, Z. (2017). Tesco says price rises are last resort as UK growth hits seven-year high.
[online] the Guardian. Available at: https://www.theguardian.com/business/2017/jun/16/tesco-
price-rises-uk-growth-inflation-pound-brexit [Accessed 10 Jan. 2018].
Worstall, T. (2017). Brexit and the Falling Pound. [online] Forbes.com. Available at:
https://www.forbes.com/sites/timworstall/2017/06/13/uk-inflation-up-at-2-9-yes-brexit-and-the-
falling-pound/#59cb42064966 [Accessed 10 Jan. 2018].
Appendix