To keep a business ahead of intense market competition, it is becoming crucial for managers of business entities to study the external environment. This will further assist organizations in making continuous modifications in their strategies to meet the changing needs as per the environment. For that reason, multinational corporations need to study the external environment, as they need to ensure success in the highly competitive global business operations of today. The external environment comprises of various factors; these include political factors, economic, social, technological, environmental and legal factors. These factors can impact the ability of a company to carry out its business operations smoothly. Therefore, to survive in the long run and keep an edge with market rivals, it is feasible for business entities to study the external factor. (Economic policy, 2015).
In the present report, a critical analysis of the external environment of TESCO PLC will be provided. Tesco is a giant British public limited company, functioning in the grocery and general retail industry since 1919. The company is providing valuable retail products and services through more than 7817 stores (About Tesco, 2013). Tesco has also diversified its operations through the years into various areas like, electronics, digital, financial services, telecom and home decor products. Tesco provide wide range of products and services in the marketplace in an ethical manner which create its distinctive image in the marketplace. It has 480000 colleagues across 11 countries. The organization manage its workforce and employees by adopting several kind of strategies which in turn it can create competitive edge in the marketplace. Here, organization adopt effective marketing tactics so as to attract more buyers and meet their expectations in an effectual manner. In addition to this, £69.7bn was group sales for 2015 and profit in the same year was £1.4bn. In this report, the impact of external environmental factors on Tesco will be explained through PESTEL analysis. The competition in retail industry will be detailed out by explanation of the selected tools.
The PESTEL analysis is a key framework used by marketing managers of Tesco to study and supervise the external environmental factors that can affect the smooth functioning of the business enterprise (Snape and Redman, 2010). The main objective of studying PESTEL analysis is that it helps in meeting the upcoming business opportunities and give advance warning against important threats. It further helps in structuring competitive business strategies that are further important for entering new markets in home country as well as foreign countries. The PESTEL analysis of Tesco, is as follows:
Political: It refers to rules, regulations and policies framed by the government of the UK that can impact the functioning of Tesco. This further involves tax rates, policies and acts of laws passed by UK and foreign government where company is operating. Thereafter, it also includes stability of UK. For instance, the government of UK has introduced Employment policies where it encourages the retail organizations to generate job opportunities for the population of UK. This will further assist the government in reducing unemployment rates. In this respect, Tesco is providing a blend of job opportunities ranging from highly paid, extremely skilled and jobs at central location (Truss, 2001). Presently, the company is providing employment to more than 5000,000 employees. Further, a large base of employees comprises of students who provide part time services, aged people who don't have other source of earning and disabled individuals. Therefore, company improves the standards of living of various individuals by generating employment. Political factor is important for taking decision with regards to trade barriers and import export policies. In this respect, Tesco is intending to enter the Singapore markets, which requires the company to consider government policies of the target foreign country. For example, one of the policies implemented in Singapore prevents companies from appointing foreign workers or employees. Therefore, Tesco while developing new stores in the host country should ensure that it appoints local citizens of Singapore only. However, due to this factor the company may face shortages in workers (Minbaeva et. Al, 2003).
Apart from this, the intensity of market competition in the retail industry is quiet high. Tesco is facing direct market rivalry from organizations like, Sainsbury, ASDA and Next. Competition has also increased recently due to the emergence of discount retailers such as Aldi and Lidl who have presently doubled their market share in the UK. However, Tesco is leading the market with a 27.9% share, compared to 16.6% for Sainsbury and 16.4% for ASDA. (Market share of retail organizations, 2015). Therefore, Tesco needs to make innovations and develop unique products and services, in order to maintain its market share.
Economic factors: It refers to economic policies, interest rate, exchange rate etc. It further involves inflation, GDP, GNP and disposable income that impacts the business decisions of Tesco. For instance, the recession in 2008 in UK adversely affected the functioning of Tesco. It further affected the demand of high end products offered by the company. Presently, interest rate of UK is 0.5% which means the company can borrow funds at a lower interest rate and invest in expansion projects and other growth activities. This will further help the company in gaining a competitive advantage over its rivals. Further, the gross domestic product “GDP” of the UK has increased up to 2.7% which is a positive indication (Monetary policy, 2015). Therefore, the growth in economy will result into growth in the retail industry and more business opportunities for Tesco to enhance its productivity and profitability. In addition to this, unemployment rates are reduced and it is currently at 5.3% which is a low percentage compared last years (Economic policy, 2015). This has further provided more purchasing power in the hands of customers. With this aspect, the company is now able to offer more goods and services to its customers. However, to meet the needs of customers in a better way, Tesco is required to be innovative and to develop new technologies and design products in a creative manner.
In addition to this economic situation can affect business of Tesco because of negotiation power available at the suppliers’ end. The suppliers of Tesco enjoy a low bargaining power due to the fear of losing their business contracts with the giant retailer. Tesco’s strong reputation in the market, the large number of suppliers of food products in the UK, in addition to the company’s ability to import cheap raw material from neighboring countries, all of these factors influence suppliers to stay associated with the company. Therefore, the costs associated with replacing suppliers are low for Tesco PLC (McEvily, Perrone and Zaheer, 2003). However, the company is required not to exploit the suppliers and force them to sell below the market prices. If the company does so, it will be violating policies of the competition act and lead to strict governmental actions.
Social factors: They involve social and cultural aspects of the country where the company is offering its services. They also involve the population growth, age distribution and considerations of health problems of the targeted customers. The change in term of liking, fashion and preferences in the social trends of the UK indicates that customers prefer bulk buying at centralized locations, therefore, Tesco is trying to offer diversified ranges of products through its convenience stores (Yang and Lin, 2009). With this aspect, the company has also increased the quantity of non-food items provided for sale. The recent analysis of the population in the UK states that the number of retired individuals is more than youngsters. Therefore, to ensure convenience to elderly people, the company is providing its services through online medium. In addition to this, the company also started providing home delivery services. Such services are still not provided by many retailers and thus they are giving Tesco a competitive advantage. Further, with the growing health consciousness among customers in the UK, the company is now providing organic food products (Snape and Redman, 2010). Being operational in the retail industry, the company faces an increased threat of substitution of products and services. Customers no longer believe in loyalty to one brand, therefore, they can easily switch to rivals’ products and services (Toh, Morgeson and Campion, 2008). To minimize the threat of consumers substituting Tesco’s products with rivals’ products, it is important for the company to improve the quality of its products. This will provide a competitive advantage to the company. It can use technology to improve marketing activities and thus boost the sales of the business. For that reason, the company has also diversified into non-food products where the threat of substitution is lower (Fernando, 2011). This further assists the organization in ensuring convenience to target customers by providing a wide range of products at one centralized location. Further, to overcome the threat of substitution, Tesco reduces the cost of its products and also provides discounts, rebates and other promotional offers. It also markets its products and services to create a sense of loyalty among customers.
Furthermore social factor also affects company because negotiation power available in the hands of customers. It might reduce the proficiency of the company (Porter and McLaughlin, 2006). With the increasing number of competitors in the retail sector, such as ASDA, Sainsbury and Aldi, this has benefited buyers as their bargaining power has increased. The products of any company can easily be replaced (Kew and Stredwick, 2008). Therefore, the company gives a proper consideration to the satisfaction of its prospective customers. Tesco keeps affordable prices and also uses promotional activities such as discount, rebate and coupons that help in increasing customer satisfaction. It also offers Clubcards that help the company in gathering information about purchasing patterns of consumers. Therefore, Tesco can use customer data and information to develop new products, make innovations in existing products and fulfill the emerging needs of customers in a better way (Toh, Morgeson and Campion, 2008).
Technological factors: Such as research and development activities and technical changes that are important for the company to survive in the long run. To keep an edge with competitors, it is important for the company to upgrade its technology and adopt new processes. This improvement in technology is also providing new opportunities for the company. The evolution of the internet shopping accompanied with home delivery is the best example. The company is now able to provide effective services to target customers. This has further reduced problems of over-stocking and under-stocking and provides services to customers round the clock (Wright, Snell and Dyer, 2005). Technology has also allowed Tesco to provide self-service points, this is another example of the effective use of technology that is resulting in a reduction in labor outlay and enhancing comfort to target customers. It also allows the company to use digital platforms to market its products to a wider audience and boost its sales. In this aspect, the company can develop new shopping applications which enable customers to use mobile applications for buying products and services. Furthermore, the company can invest in new technologies regarding projects on energy efficiency which will further assist the organization in attaining its mission to minimize carbon footprints (Snape and Redman, 2010).
Environmental factors: These include the environmental aspects that can impact the functioning of Tesco’s business activities. With the increasing concern among government and society regarding environment conservation, it has become important for Tesco to consider environmental factors properly (Lynch,2009). In this respect, the company is investing significant amounts in energy efficiency projects that will help in reducing carbon footprints. Also, the company currently operates six zero carbon generating stores, out of which four are functioning in the UK. This has helped Tesco utilize 66% less energy than other outlets. In addition to this, Tesco PLC uses rainwater harvesting methods and utilizes the same source of water for cleaning purpose for making its good position in the marketplace. It is also implementing a Passive InfraRed lightning system which senses movements inside the stores and disconnects the electricity when all employees and customers have left. Further, company is using Co2 in refrigerators rather than other gases that are more harmful for the environment (About Tesco, 2013). Tesco is investing in energy control systems that reduce the redundant use of energy. It is also taking significant steps for reducing waste produced in its stores by enhancing ethical aspect in the marketplace (Porter and McLaughlin, 2006). Constantly keeping the environmental perspectives in mind, Tesco is also installing renewable energy processes like, solar panels, wind turbine, and ground source heat pumps. It facilitates to make environment clean and safe for local community.
Legal factors: The legal factors include all the legislative policies that have a direct impact on the functioning of Tesco PLC’s operations. It involves various laws generated by UK government, such as employment, competition, health and safety and consumer protection law. Therefore, the company is also required to consider various laws applicable for the retail industry. In this respect, the Food retailing commission has generated guidelines for retail companies under which an organization cannot modify its prices before giving a prior notice to its different stakeholders(Meyer and et.al, 2002). This competition policy is preventing Tesco from increasing the prices of its goods and services, otherwise buyers are likely to shift towards the offerings of its rivals.
It is also creating rivalry and fierce competition between Tesco and other retailers, forcing them to indulge in and abide by healthy trade practices.
The competition policy also includes other policies, such as the grocery code of practice. The main objective of this policy is to protect grocery retailers from unethical practices and enables them to work by considering well being of general communities and related stakeholders. However, the company is accused of breaching the grocery code of conduct and therefore it is liable to pay a penalty up to 1 % of its gross turnover (Breach of grocery code, 2013). This breach has caused a negative impact on the reputation of the company. Another legal factor is the health and safety law, it is important for Tesco to maintain health standards of employees by providing a safe and healthy work environment. In this respect, the company maintains the hygienic levels of its stores and ensures they are cleaned regularly with disinfectants. Furthermore, considering the discrimination policy, Tesco is required to provide equal employment opportunities to men, women and disabled individuals. Therefore, the company cannot discriminate on the basis of gender, religion and nationality etc (Bloom and Michel, 2002). This encouraged the company to pay a special attention to its recruitment and selection programs and ensure equal opportunities are provided to all the competent candidates.
Such as new firms that can enter the retail industry and perhaps increase the competition for existing organizations. The company faces a low threat of new local entrants due to the high costs of setting up retail stores. Here, new firms find it difficult to get economies of scale and set business in cost effective manner. Owing to this, Tesco can effectively work in the direction of growth and success (Gabriel, 2004). However, due to policies such as liberalization and globalization, the company may face a threat of foreign retail companies entering the UK market. Tesco PLC has been operating in the retail industry for the past ninety-six years, its good reputation may therefore reduce the threat of new entrants, as it enjoys brand recognition among its customers and this is a benefit which is not available to new entrants. The main advantage available to Tesco is its capability to buy in bulk quantities, which assists in providing competitive prices (Bloom and Michel, 2002). Taking the above in consideration, Tesco PLC is investing in its services and products to meet the needs of target customers and to enhance brand loyalty.
Hence, from the aforementioned external factors, it is evident that the company is makings constant modifications in its processes. By adapting to the changes as per the environment, Tesco can survive in the long run. This adaptation can enable it to design competitive business strategies which will assist in enhancing productivity and profitability.
In recent years, Tesco has been encouraged to reduce all the negative impact of its operations and activities on the environment. It has also been forced to use more sustainable practices. The issues which have been faced by the organization are related to energy saving, climate change, forest conservation, farmlands and marine conservation. These issues are mentioned below as:
Climate change- The global warming, due to activities and operations of businesses is considered as one of the biggest threats to the environment. Tesco has been forced to use more sustainable practices and to lower its rate of carbon emission (Mason, 2007).
Farmlands- The retailer is also facing issues related to adoption of more sustainable practices during agriculture. This includes products from livestock to other non food agriculture products (Gabriel, 2004).
Forest- Another major issue which has been faced by Tesco PLC is the cutting of trees. The retail has been forced to use practices which do not promote or lead to any kind of a deforestation. This led Tesco to revise all of its plans and policies and aim at achieving zero net deforestation (Bloom and Michel, 2002).
It can be stated that the retailer is required to ensure its operations do not impact the environment negatively, and to conduct corporate social responsibility initiatives toward the society. However, with the intense competition, achieving a competitive advantage is not easy in such situations. Therefore, Tesco PLC should introduce sustainable practices, to save the environment; avoid violating the law and to promote these practices to enhance its reputation and market share (McEvily, Perrone and Zaheer, 2003). This will create a sense of satisfaction among customers as well as employees, which in turn will enhance Tesco’s brand and employer image. Therefore, it can be stated that in order to survive and grow in the market, the retailer is required to overcome all the environmental related issues which it is presently facing.
It is evident from the above analysis that organisations cannot achieve success without using their external environments to their advantage. Through analyzing the external factors affecting Tesco PLC’s operations, it can be concluded that the company may achieve a competitive advantage, through constructing a business strategy which caters to all these external factors. The PESTEL analysis provides a better understanding of the market, in which the company is functioning, as well as the legal, environmental, social and political situations and constant changes in the UK which organisations must take into consideration.