Business Model Interrogation and Development in Tesco Plc - Example

Business Model Interrogation and Development: Tesco Plc Contents Introduction 3 Discussion 3 Organizational Structure of Tesco Plc 3 The Product Market and Capital Market Interaction of Tesco Plc 4 Product Market of Tesco Plc 4 Boston Consulting Group Matrix of Tesco Plc 5 The Product Life Cycle 8 Tesco Balance Score Card 10 Competitors Analysis and Relative Profitability 10 The Capital Market of Tesco Plc 12 The Capital Structure 13 Corporate Restructuring: Recent Merger and Acquisitions 14 Off Balance Sheet Financing 15 15 Technological Changes and Scope for Improvement 16 Conclusion 16 Reference List 17 Introduction Business model of an organization provides the foundation of business operations for an organization. In other words, an organization’s rationale behind adopting its method of production, sales and distribution, values and customer services in a particular societal and economic context is highly based on its business model (Baligh, 2006). The paper will critically analyse the business model of the London based multinational superstore Tesco Plc in order to understand the architecture of the company, existing business model and to evaluate suitability of this model in the changing global marketplace. Tesco Plc is one of the leading multinational groceries in the world with operations in more than 12 countries. This retail company is third largest in the world in terms of profitability whereas regarding revenue; it is the second largest (Tesco Plc.com, 2015). Though the business model of Tesco Plc is appeared to be sound, serious investigation of the business model is required to identify and bridge the gap in existing business model in order to ensure sustainability of the company in future as well. Discussion Organizational Structure of Tesco Plc An organizational structure indicates the nature of task allocation, level of supervision, coordination, monitoring and control, decision making procedure of organization. Though a number of organizational structures can be identified in the study of organization behaviour, the structure of Tesco Plc is customised according to the business need of the company. The organization incorporates a functional as well as decentralised structure. Functional structure of the organization helps Tesco Plc to achieve operating efficiency in various geographical locations especially in rigid markets. However, standardization of the operational activities in each location sometimes become cost ineffective for the company. Decentralised organization structure specifies delegation of power and decision making authority to the middle and lower level managers in order to ensure rapid and effective decision making regarding stock requirement in the stores and managing inventory. (Robbins, Judge, Millett and Boyle, 2013) Store Managers are appointed in each Tesco Stores under supervision of Regional Managers to take immediate actions and infuse continuous motivation among employees in order to ensure customer satisfaction which in turn brings customer loyalty. Figure 1: Organizational Structure of Tesco Plc (Baligh, 2006) The Product Market and Capital Market Interaction of Tesco Plc Product Market of Tesco Plc In product market goods and services produced by a company are sold to the households. The product basket of Tesco Plc is one of the most diversified which include a series of items starting from food and non food items, books, electronic goods, internet services, financial and telecommunications as well as petrol and software. In Tesco Stores, the company always strives to introduce all newly launched products much before its competitors. As the products are available at the point of sale, these are automatically sold, depending on the attributes and attractiveness of the products. Market research has shown that more than 20% of the sales are done without any promotional effort of employee assistance (Mailonline.com, 2012). Figure 2: Product market Interaction of Tesco Plc (Grant, 2010) However, Tesco’s strategy to charge a higher price in comparatively smaller outlets such as in Express and Metro Stores rather than mainstream superstores leaves negative impact among consumers (Retail Week.com, 2013). As the company communicates with product market with a well established, strong distribution network, distribution channels hold huge importance in the operation of Tesco. NIVEA is the biggest and most cost effective distribution partner of Tesco. The company uses centralized distribution point in UK to interact with wholesalers, retailers, distributors and online delivery in a time and cost effective manner (Hitt, 2009). Boston Consulting Group Matrix of Tesco Plc Boston Consulting Group (BCG) Matrix is a strategic tool used by companies for analysing the growth share and competitive position of the company into the industry. The four constituents of this matrix will be used to analyse growth share and competitive industry position of Tesco Plc (Cole, 2003). Star Star signifies the position of a company with high market share in a high growth potential industry. A company in the star position experiences wide customer base, huge customer loyalty and sustained profitability. If the transitory turmoil can be ignored, with a 30.9% of market share and high growth rate in the retail industry indicates the company’s ability to generate sufficient revenue in near future (Randall and Seth, 2011). Before 2008, Tesco’s position in the Star segment was established and the company’s motivation for investing more money to maintain its industry position in UK market was justified through analysing the past trend of its profitability and maintained market share (Hitt, 2009). Cash Cow As a result of operating in the matured market, cash cow shows ability of a firm to generate a higher return as compared to industry return. This is observed particularly in a slow growth market. Analysing the recent trends of the company it can be inferred that Tesco Plc is slowly moving from Start to Cash Cow as a result of operating in matured UK market where the growth potential of the retail industry is almost saturated (Varley, 2014). Hence, Tesco’s effort to invest in promotional activities and technological development may not prove to be fruitful for the company in future nut as of now, the UK operations of the company holds the position of Cash Cow (Galbraith, 2014). Figure 3: BCG Matrix for Tesco Plc (Cole, 2003) Question Mark Question Mark is a position in which a company operates in a high growth market but with a low market share. As the industry is having enormous growth potential, opportunity is there for the firm in Question Mark segment to move towards Start and becoming the market leader. However, if the company cannot accelerate its business process keeping pace with the industry growth, there is substantial scope for the company to go out of business (Varley, 2014). Tesco’s operations in emerging nations such as in India signifies its Question Mark position as the company could not take the advantage of retail market expansion in this economy and hence viability of business in these economies remains a question for Tesco Plc (Taylor, 2014). Dog Dog indicates the position of a company with very low market share in a slowly growing industry. In most of the cases, a company operating in this segment of the matrix fails to generate revenue to meet its break-even point and as a result the company may have to shut down over a period of time. Considering the current global business performance of Tesco Plc, the company cannot be positioned as Dog in near future (Metzger, 2014). The Product Life Cycle Figure 4: Product Life Cycle Every product in the industry comes with a definite life cycle starting from introduction in the market to growth, maturity and decline. This cycle is known as product life cycle. Introduction In spite of huge initial investments done by the company, the concept of superstores being new in UK retailing industry and with existence of few competitors, Tesco gained significant consumer attention that helped the company to expand business in upcoming future. Growth Once the company incurred all its initial cost and crossed the breakeven point, Tesco experienced considerable growth in terms of market share and revenue. Even during the period of 2010-2012, when the industry experienced entry of discounters that had increased the level of competition, the company has been able to manage a market share of more than 30%. In terms of revenue and profitability as well, Tesco maintained its leading position as the company had been able to capture the growth potential in market. Figure 5: Financial Performance of Tesco over last 5 years (Tesco Plc.com, 2015) Maturity Presently the company is in maturity stage where the scope for growth and profitability of the company has been saturated and the company is required to infuse more fresh capital in order to expand its business. Structural modifications and improvement is also required in order to bring innovation in the business for attracting fresh customers. Decline With a large number of discounters such as Aldi and Lidl and existence of large hypermarkets, Tesco is about to enter the decline phase. Defective pricing and promotional strategy and rising competition, establishment cost have resulted in a market decrease in the sales of Tesco Plc. In fact, the existence of the company has been threatened and has compelled the company to re-module its business plan and infuse fresh capital to amend the required changes. Total Quality Management and Just-In-Time Tesco always strives to ensure customer satisfaction in order to acquire customer loyalty. For this purpose, the company has applied Total Quality Management in order to achieve efficiency in operational activities, organizational culture and management. Just-in-time has always been incorporated in the procurement process in order to minimize the gap between products obtained from suppliers to inventories and from inventories to the shelves of supermarkets. Quality assurances of Tesco products are always guaranteed and the company always drives to present products according to the consumers’ need. Quality inspection is done in order to supply defect free products in supermarkets. Tesco has set its own benchmark for quality assurance and always tend to supply products that complies with the pre determined standards so that they can always exceed the customer needs. Priority has been given in eliminating non-valued elements and includes those elements that can add value to the company’s operations. Emphasis has also been given to enhance quality of performances of the employees as they are regarded as the face of the company (Zhao, 2014). Tesco Balance Score Card Balance scorecard is a strategic planning tool that is used by business enterprises to comply its business activities according to the mission and vision strategies obtained by the organizations. Tesco incorporates the balance scorecard method in order to measure the company’s strategic performances from four difference perspectives. Tesco’s management has realized that no single perspective among these can lead to enhance the targeted performance of the employees and the business as well (Mollah, 2014). The balance scorecard observes the financial objectives of the company and calculates to what extend Tesco has been able to achieve these pre-determined objectives under financial perspective. In customers’ perspective, the scorecard measures level of customer satisfaction, acquired market share and the ratio of repeat customers. While calculating all these, the scorecard also takes into account the internal perspective that measures to what extent financial and customers’ perspective of the company is aligned with internal business objectives. Finally, balance score card also assists Tesco to identify individual performances of Tesco staffs and determine the requirement of training for the personal development of the employees in terms of required skill and the growth of the organization as a whole (Abraham, Subramaniam, Alauddin, Gîdea and Zuyeva, 2013). Competitors Analysis and Relative Profitability Figure 6: UK Retail Market Share as on 2014 (Mentis, 2013) The UK industry in which Tesco Plc operates is characterised by a large number of strong competitors such as Wal-Mart, Sainbury’s, Morrisons, Asda etc (Chisholm, 2003). In 2006, Tesco used to be the fourth largest retailer whereas after March, 2011 the company started gearing up its business activities and tends to capture a larger market share. In 2011 and 2012 the market share of Tesco Plc is respectively 30.2% and 30.6%. Considering the financial performance of the company, Tesco’s annual sales increased by 6.5% from £42.8bn in 2011 to £65.17bn in 2012. The online sales rose to 10% over the period of time (Tescoplc.com, 2014). Figure 7: Competitive Analysis of Tesco Share Price (Morningstar.com, 2015) The Capital Market of Tesco Plc Tesco Plc is listed in London Stock Exchange with a market capitalization of £18.88 billion as on August, 2014. Taking the statistics of last five years starting from 2010, it is evident that the company has experienced considerable fluctuations mainly due to broken investors confidence and instability of UK economy in the post recession period. Figure 8: Volatility in Equity Holding of Tesco Plc (2010-2014) (Tescoplc.com, 2014) However, Tesco’s stock price trend continues to slope downward from early 2012. Complications in the Britain supermarket chains coupled with unjustifiable decisions of the then CEO Philip Clarke to drive excessive merger and acquisitions and improfitable expansion pushed the company to experience a death spiral which may yield serious consequences for the company (Schmidlin, 2014). Figure 9: Death Sprial of Tesco Plc (The Market Oracle, 2015) The Capital Structure The capital structure of Tesco Plc can be explained through Modigliani Miller Theory of Capital Structure. The theorem explaines that, if two firms are identical in terms of all aspects rather than their capital structures i.e. one firm is financed by equity only and the other firm has proportionally used debt and equity in their capital structure, then also the value of the two firms will be identical (Lee, 2008). Considering the capital structure of Tesco Plc, the company includes both debt and equity financing in their capital structure. In 2013, Tesco issued 19 million of shares (0.05p each). Being a public limited company, no shareholder holds a large chunk of share so that the company can be controlled by that individual group or person. Coming to the debt component, such types of financiang of Tesco Plc consists of deferred tax liabilities, institutional borrowings and derevatives and post employement benefit obligations. The total debt in 2013 costituted for £14.483 million which shows an increase in debt financiang by 5.47% from 2012 (Harrison and Estelami, 2014). Considering the volatility of the market in the post recession period, a capital marekt beta of 0.8659 of Tesco indicates that the fluctuation in the share prices of the company is less than that of the marekt as a whole. A sound debt to equity ratio of 0.70 also indicates financial stability of Tesco’s business. The ratio was .87 in 2013 and .77 in 2012. This indicates that the company is concentration on enhancing more equity participation in order to minimize riskiness of business (Morningstar.com, 2015). Figure 10: Capital Structure of Tesco Plc (Morningstar.com, 2015) Corporate Restructuring: Recent Merger and Acquisitions Tesco went through a series of mergers and acquisition since its inception. Recently in 2013, Tesco acquired Fresh & Easy Stores in order to pull the sales of US market. Such acquisition costs for £1.2 billion which was managed by the company by selling its loss making units Ronald Burkles and Yucaipa. However, the company did not disclose the amount they received by selling those units. However, after Dave Lewis took over the post of CEO in 2014, Tesco announced that 43 loss making stores will be liquidated and the plan of further expansion in terms of establishing 49 large supermarkets will be cancelled in order to generate cash for fresh investment in existing business. In January 2015, the newly appointed CEO also announced to retrench 2000 redundant staffs as a part of the plan of another £250m cost cutting. Lewis also sold out Blinkbox and Talktalk on January 2015 (Niemeier, Zocchi and Catena, 2013). He announced that Tesco has already suffered a lot due to its uncalculated expansion activities which had only yielded the company with a weak financial health. Hence, at present the company must take corrective actions and reconsider the viability of every expansion program in order to revive its finances and confirm the company’s subsistence (Galbraith, 2014). Off Balance Sheet Financing When a company restricts itself from including a liability in its balance sheet, it is known as off balance sheet financing. This is a very attractive strategy for the highly levered companies in which the debt component is so high that adding some more liabilities will increase the riskiness of the capital structure to a great extent. Prior to 2009, the company was known for its sale and leaseback activities. Between the period of 2009 and 2013, Tesco announced 6 small value purchase (SVP) through a subsidiary Tesco Property Finance and issued approximately £3.6bn of bonds for tenure of 30 years to the investors. Figure 11: Property Bond Payment Structure of Tesco For each SVP, a limited partnership was established by Tesco to which the package of properties were sold and leased back for 30 years and linked with an adjusted retail price index (RPI). Purchase of such properties was financed by the 30 years bonds. As the bonds and the loan from partnership are identical, problem arises in terms of cashflow disparity between the two payments and receipt. In order to control such discrepancy, the company arranged a series of swaps. Netting off of various swaps had resulted the company to receive the bond proceeds and repayment of the interest and principal amount. To keep it in a simplest form and avoid all sorts of complexities in calculation, Tesco decided to exclude the transaction from their balance sheet. In 2013, Tesco’s effort to appoint off balance sheet leasing helped the company to lower its debt artificially by £2bn (FT Alphaville, 2014). Technological Changes and Scope for Improvement Tesco puts significance effort in modernizing its superstores and small outlets. The company’s effort to introduce point of sales software in every outlet in order to provide fast-track customer service, close circuit televisions to monitor customer reactions and ground staffs’ effort to ensure customer satisfaction as well as use of latest technology for supply chain management, inventory and stock control ascertains the company’s competitive advantage as compared to its competitors (Computerweekly.com, 2009). Recently, Tesco is planning to choose social media and other online platforms for advertisement and promotion of the brand (Chesbrough, 2013). Conclusion Tesco Plc is the leading grocery superstores in UK and other global locations in terms of sales, profitability and market share. As the company was experiencing serious mayhems in the recent past, analysis of the business model of the company has become important. Extensive study has shown that the company was facing serious delinquents regarding customer satisfaction with their pricing and promotional strategies. As a result of running chief functional activities in matured, recession driven UK market, the financials of Tesco Plc was shaping in a wrong direction which might prove to be hostile from the company’s perspective. However, over a period of time Tesco has been able to secure a moderate growth rate and profitability but still huge scopes are there to improve business practices of the company. 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