The main purpose of conducting project is to analyse the business strategy of Tesco Plc. Furthermore, comparison will be made with other two companies such as Morrisons Plc and Sainsbury Plc which are listed on LSE (London Stock Exchange). By analysing strategic model of company so that stakeholders may be able to invest in it.
Background of organisation
Tesco Plc is one of the biggest retail multinational organisations headquartered in UK. It was founded in 1919 by Jack Cohen. Company has effectively diversified its business and satisfies customers by providing quality products and enhanced services.
Tesco Plc's competitive advantage will be compared and benchmarked with two UK based organisations engaged in retail business i.e. Morrisons Plc and Sainsbury Plc. Tesco Plc has competitive advantage as it satisfies customers up to a large extent and will be able to attain good quantum of market share in the future course of action.
The main issue faced by Tesco Plc is grocery inflation which has transformed from negative to positive and this will weaken Pound Sterling implying that more of the gains will be entertained by suppliers of UK. The prices would have to be cut down leading to lower profits and thus, inculcating problems in stores.
2.1 Industry Analysis by conducting Porter’s five forces model (modified)
Porter's five forces model is quite effective in analysing competition and position of company in the industry. The model in relation to Tesco Plc is listed as below:
Threat of new entrants
These are the barriers to entry as if market is performing well, more competitors will be attracted to enter in market and earn profits. Hence, cut-throat competition can be seen leading to entry barriers to new firms. The factors include existing loyalty of Tesco Plc, more fixed cost, complying with government regulations and high requirement of capital.
Bargaining power of suppliers
This is one of the main factors that can lead to affect operations of business as it is heavily reliant on suppliers to provide raw materials. Tesco Plc is engaged in retail market and requires materials from suppliers and if they demand more prices, then costs will be injected for company. It prevails when very few of them are present in the industry. Buyers' need those products which cannot be made without taking raw materials from suppliers (Morrison, 2016). Get the best assignments online at the best price.
Bargaining power of customers
When even one customer has an impact on sales volume and profits, it implies that substantial power is hold by him. It particularly relates when there are few customers in the market. They purchase larger volume of goods from the organisation. Furthermore, they are sensitive to prices of products. There are substitutes available in the market.
Threat of substitutes
It is one of the main reasons for which company' operations can be affected if there are certain substitutes prevailing in market of its products. These substitutes are comparatively lower than organisation's commodities and this attracts customers to purchase goods of lower prices affecting profits up to a high range. Hence, consumer’s switching will take place leading to suffer losses to the firm.
Rivalry in industry
Tesco Plc is quite effective in attaining the profits by satisfying customers. The rivals such as Morrisons Plc and Sainsbury Plc are major rivals prevailing in the UK market. It is required that firm may make well-structured strategies to attain larger customer base. The retail industry is highly competitive and firm earns lower profits as intense competition exists. Factors which limits other organisation to enter are industrial growth, incurring high expenditures on advertising and promotional tools (Fulker and et.al, 2016).
It is enhanced point included in Porter’s five forces model. Technological disruption means that innovation which creates and develop newer markets. In contrast to this, existing markets are disrupted and sales are minimised as well. This affects large firms such as Tesco Plc having variety of products and services. Hence, affecting overall market share of the existing organisation.
3.1 Financial performance
The financial ratios for company and its rivals are calculated as below:
The ratios have been computed for three organisations above. Financial ratios are quite useful for analysing overall financial performance of company. Profitability ratios such as Net profit margin, gross profit and ROCE is calculated. Furthermore, current ratio is also computed for the firms. All of three firms are profitable enough and have good customer base. In relation to this, ratios would show how much effective, they all are in comparison to one another. Tesco Plc had current ratio of 0.60 in 2015 which increased to 0.75 in later year. It further increased to 0.79 in 2017 and decreased to 0.71 in recent period. On the other hand, current ratio of Sainsbury Plc was 0.64 in 2015 and slight increment was attained in 2016. Moreover, it reached to 0.74 and 0.76 in last two years.
Current ratio of Morrisons Plc in 2015 was 0.50 which went on decreasing and reached to 0.41 in 2018. This implies that liquidity position of organisation is not good as it should be at least 2 :1 which is ideal ratio. It can be analysed from current ratio that Sainsbury Plc has good position in comparison to Tesco Plc and thus, it will be able to pay-off current liabilities within time. On the other side, gross profit margin of Tesco Plc was -3.9 in 2015 which became positive in 2016 as it reached to 5.3 in 2016. It further elevated in 2017 to 5.2 and 5.8 in 2018. This shows that it is perfectly controlling and reducing expenditures to earn more profits. Sainsbury Plc had 5.1 in 2015 and increased to 6.2 in 2016 and same in next year. Furthermore, 6.6 was reached to 2018. This means that company has initiated good control over operational expenses.
Morrisons Plc had 4.5 of gross profit in 2015 which came to 3.7 in 2018. It shows that Sainsbury Plc has good margin in comparison to other three companies. Net profit margin was -9.22 in 2015 of Tesco Plc and reached to 0.2 in 2016. It further decreased in 2016 to -0.07. However, position was good in 2018 as it was 2.1. Morrisons Plc had -4.53 in 2015 and maximised to 1.8 in 2018. Sainsbury Plc had -0.7 in 2015 and reached to 1.02 in 2018. The net profit of Tesco Plc is good. ROCE is computed which shows that Sainsbury Plc had -0.75 % in 2015 and increased to 3.50% in 2018. Morrisons had -11.48 % in 2015 and reached to 5.77 % in 2018. Tesco Plc has -26.13 % in 2015 and increased to 5.07 % in 2018. This implies that Tesco Plc and Sainsbury Plc has good performance in relation to financials.
3.2 Industry Specific Performance
The above graph shows that retail industry decreasing trend in the past years. However, 2017 financial year had been fruitful for organisations as 50,000 million GBP of sales were accomplished in October month. But it, reduced in last quarter to below 30,000. It can be interpreted from the chart that retail sales will increase and more revenue would be achieved.
Market share of all three organisations have been summarised in above chart. It reflects that Morrisons Plc has 10.6 % of total market share highlighted in red (Market share of grocery stores in Great Britain from August 2012 to August 2017). On the other hand, Tesco Plc has nearly 27.7 % and Sainsbury Plc's share in the UK market is 15.6 %. These figures clearly shows that Tesco Plc has good quantum of market share whereas other organisations have lowest.
Limitations of Analysis
4.1 Limitations of Strategic Analysis
PESTLE analysis is carried out by assessing external environment which tends to change as business operates in dynamic world. It is the biggest limitation of such analysis as fluctuations in currency can prevail and purchasing power of people never remains same. Moreover, technological environment also changes which has unfavourable results. On the other side, Porters-five-forces model helps to effectively assess competitive advantage of Tesco Plc which means that it has useful for company. However, main limitation is that industry remains static and never changes. Furthermore, globalisation factor is also ignored in Porters-five-forces model which has large impact on firm (Wentzensen and Wacholder, 2013).
4.2 Limitations of Financial Analysis
Financial statements are used to analyse company's performance. Main demerit is that these are based on historical data and no relevance with regards to current performance. In simple words, past information is evaluated through scrutinising financials. It does not take into account current data to assess performance which is the biggest limitation. Moreover, inflation factor is also important factor which is ignored as well. It distorts performance of organisation and thus, inflated figures do not find place in such analysis. Furthermore, economic factors are another crucial elements affects overall performance which is not included in financial statements. Hence, it can be said that financial analysis has certain limitation distorting performance of company (Elenkov, 2014).
Hereby it can be concluded that business has to perform good so as to achieve good customer base and eventually higher market share. The report highlights that market leader of retail sector is Tesco Plc and followed by Sainsbury Plc and Morrisons Plc. The financial performance of Tesco Plc is increased in 2018 as shown by conducting ratio analysis. Furthermore, trend analysis of liquidity and profitability position also implies that company will outperform competitors.
It can be recommended to Tesco Plc to initiate control upon its expenses so that profits can be enhanced quite effectually. Furthermore, it shows that firm has to explore more markets by which it may be able to garner income in foreign currency with ease. It will help organisation to tap new markets and enlarge existing customer base and thus, increasing its overall growth. Moreover, it is also recommended diversifying business operational activities to inject revenue and stay on topmost position in sector. Innovative products are required to garner sales.
The strategy evaluation can be divided into suitability, feasibility and acceptability by implementing JSW model. Suitability outlines hybrid strategy which is used to analyse external factors helping to achieve competitive advantage by Tesco Plc. On the other side, feasibility states that there are 6M's such as Money, Machinery, Manpower, Markets, Material and Make-up which are to be feasible to achieve stated goals within stipulated time. Acceptability is reviewed from stakeholders and financial performance of company (Andrews, Linn and Yi, 2017). Stakeholders have positively accepted and supported various plans to accomplish growth and further, will accept as well. Financial growth is quite remarkable as profits are produced and is increased year after year.
Financial Data Modelling
Past Trend Analysis
The above past trend of Tesco Plc shows that in 2014, 2015 and 2016, performance was not good which has affected net profits up to a high extent. However, after that period, financial year 2017 and 2018 both have produced good income. Hence, Tesco Plc performance is maximised in past couple of years.
Future Trend Analysis
The future trend of ratios and income statement is done showing that Tesco Plc will perform better in forthcoming period (D’Mello, Gao and Jia, 2017). It is clarified from net profit margin, gross profit margin, ROCE and current ratio that values will be increased highlighting good performance of firm. The trend line equation is being used to forecast trend of financial ratios by putting values and next four years ie 2019, 2020, 2021 and 2022 have been computed. Overall growth would be achieved in future course of action.
- Andrews, A., Linn, S. and Yi, H., 2017. Corporate governance and executive perquisites. Review of Accounting and Finance. 16(1). pp.21-45.
- D’Mello, R., Gao, X. and Jia, Y., 2017. vorheriger Artikel Mitigating political uncertainty nächster Artikel Articulation-based accruals. Review of Accounting Studies, 4(2016).
- Elenkov, D., 2014. Experiential Exercise with Multinational Student Teams: Researching Together a Multinational Corporation and Developing Jointly a Strategic Marketing Plan for IT Using Blackboard. Developments in Business Simulation and Experiential Learning. 41.
- Fulker, D. and et.al, 2016. A Case Study of the Grey Oaks Community and Club: Creation of a High-Performance Culture Through the Innovative Use of a Data-Driven Business Plan. International Journal of Hospitality & Tourism Administration. 17(1). pp .72-99.
- Mackey, T. B., Barney, J. B. and Dotson, J. P., 2017. Corporate diversification and the value of individual firms: A Bayesian approach. Strategic Management Journal. 38(2). pp.322-341.
- Wentzensen, N. and Wacholder, S., 2013. From differences in means between cases and controls to risk stratification: a business plan for biomarker development. Cancer discovery. 3(2). pp .148-157.