1. 1. EXTERNAL ENVIRONMENTS ESSAY -BARRIE COOKTESCOAll businesses are affected when changes happen in their externalenvironment, this essay is going to look at how these changes over the pastthree years have affected Tesco plc and what the company has been doingto adapt to these changes. The threats and opportunities that arise from thiswill also be discussed.Tesco is a British multinational grocery and general merchandise retailer. Itwas founded in 1919 by Jack Cohen from a market stall in London's eastend and first floated on the stock exchange in 1947. Since opening its firstsupermarket in Maldon, Essex in 1958 it has grown dramatically and nowoperates in 12 countries around the world and employees over 530,000people. In 2012/13 Tesco plc posted a group trading turnover of 72,363million, an increase in growth of 1.3%, for the same year its group tradingprofit was 3,453million which is a reduction in growth of 13%.Four different external environments will be explored in this essay,Political, Socio-cultural, Technological and beginning with arguably themost important economic.The recent downturn in the economy, especially in the UK, has certainlyhad a negative impact on Tesco as people don't have the money to spendlike they used to and it is undoubtedly a major factor in the growth oftrading profit being down.The UK is Tescos biggest market as it contributes more than two-thirds ofgroup revenue so this along with the fact that in Britain Customers havecut back most on non- food items and that Tesco offers a higher proportionof these items compared to its rivals, means the company was hit hard bythe economic downturn in the UK. This downturn has lead to governmentausterity cuts, rising unemployment and falling real incomes all whichmeans customers are seeking cheaper ranges and this has lead to theemergence of so called hard discounters such as Aldi and Lidl as a realthreat to Tesco. The company is losing market share to these discounters atthe bottom end of the market and to Waitrose at the top end and with
2. 2. recent industry data still showing a share of the market year on yeardecline for Tesco it knows it has to react to these threats. Tesco's CEOPhilip Clarke said on Aldi and Lidl in a recent interview you cant ignorethem. No retailer can, you have got to have sharper prices and betterquality. In a bid to lure back shoppers he has also pledged to cut pricesbetween 10 and 30% on more than 3,000 products, mainly food. Heavyinvestment in store upgrades, more staff, its online offer and productranges are all part of Tesco's recovery plan and in 2012 the companylaunched its 'Everyday Value' range which was designed to compete withthe likes of Aldi and Lidl.Only time will tell if these measures will be a success and if the companycan regain some of the market share it has lost but it has reacted to thechanges in its economic environment and there are positive signs such asthe everyday value range growing fast and being up 10% like for like.Another one of the 12 countries the Tesco group operates in is SouthKorea, which is its biggest market outside the UK. It is in this market thatTesco has seen another change in its external environment affect thebusiness, this time it is politically with changes in regulations by thenational government having a serious impact on the company. It runssupermarkets under the Homeplus brand and the company finds itself inthe middle of a long running political battle about whether supermarketsare crushing small markets and corner shops. The South Koreangovernment had previously enacted legislation that limit the areas wheresupermarkets can open but worse was to come for Tesco. In 2012 newregulations were introduced that have restricted opening hours for bigretailers. Tesco stores now have to close for 2 Sundays a month and on theSundays which they can open their opening hours have been restricted.Sunday is the biggest trading day in South Korea. The company estimatedthese regulations would cut its profits by about 100 million a year.These new regulations are a blow to Tesco's operations in South Korea andalthough they have no choice but to comply with these regulations they arevery keen to alleviate these political fears by portraying itself as fostering asense of community in the country, in the hope these regulations will berelaxed. To do this it runs cultural centres in stores which offer serviceslike English lessons and violin classes so although these regulations are abig threat to the profitability of the company they have forced the Tesco toembrace the opportunity to try and engage the community and to be seen
3. 3. as having a very positive impact on South Korea as a whole.Tesco recognise that if it is going to grow and be successful in SouthKorea and Asia as a whole, the skill composition of its labour force has tobe developed and nurtured. The company knows that if it is to expandacross Asia it needs fully qualified and trained staff to achieve this. PhilipClarke CEO has said We have plans to expand across Asia in years tocome. We need to develop our local talent. Tesco has been pro-active tothese changes in its socio-cultural environment in this part of the world byopening a training academy in South Korea. Over 30 million has beeninvested in the water front facility which opened in 2011. Tesco has over100,000 employees across Asia and the plan is for around 24,000 of thesestaff to attend training courses at the academy each year. Courses in theacademy range across all of Tesco's operations and staff will be trained,mentored and connected with colleagues across the world. Also itsimportant to the company that staff have a understanding of its roots so theacademy boasts a Tesco museum that is designed for exactly thatobjective.The company has been pro-active in taking advantage of this opportunityto be at the forefront of developing staff in this market and it was the firstFTSE 100 company to open such a training academy in Asia. Opening thisacademy should help build Tesco and its reputation in what is already alucrative market for the company.The technological environment of business is a constantly changingenvironment and Tesco are aware that they need to react quickly to thesechanges. One change it has reacted to is the increasing popularity andgrowth of the tablet market. In a risky strategy in September 2013 Tescolaunched its own tablet computer called the Hudl. The Hudl is a colourful,android operated tablet with a 7inch HD widescreen display. It retails for119 though clubcard customers can get it for less than 100. It remains tobe seen if they can establish a place for the company in a marketplace thatis dominated by the might of Apple and Amazon and if they can competewith these companies going forward as tablets are evolving constantly. Anopportunity that Tesco have seen and are taking advantage of is a link
4. 4. between their new tablet and their online shopping website as the Hudl hasa built in Tesco button which allows users to shop, which should see anincrease in online sales. Also Tesco see the launch of the Hudl as a way totry to reconnect with its customers as the device was built from scratch andcustomer consulted. Tesco hope the Hudl will get a good reception fromshoppers and reviewers which will give the company respect in the tabletmarket which it can build on going forward. As Mike Mcnamara TescoChief Information Officer said You should expect technology to be acontinuing part of our relationship with customersAs Tesco battles declining sales in traditional stores the company has plansto accelerate global investment in digital technology. This includeslaunching new digital music and book services in the uk, via digital formatlaunching clubcard in China and expanding online food shopping intoBangkok and Shanghai. Tesco realises how important it is to react to thesetechnological changes around the world and in 2013 invested 492 millionin technology which is 3 times more than in 2010. Again stepping intosome of these markets will put Tesco into competition with some bigcompanies already established in them. In the UK Tesco currentlycompetes with Lovefilm and Netflix after buying blinkbox in 2011,blinkbox allows customers to download film and television programmesover the internet. The plans to launch blinkboxmusic and blinkboxbookswill see Tesco in competition with the digital giant Amazon and thishighlights how ambitious Tesco is being. The threat therefore is again thatTesco struggles for market share as it bids to take customers away frommore established companies. Tesco controls 45% of the online grocerymarket in the UK but its online offer elsewhere in the world has beenlimited so far. The plans to roll out online grocery shopping to the bigAsian cities is a great opportunity for Tesco to become the market leader inthese countries as it is in Britain.A model that is commonly used to look at the external environments thataffect business is the PEST model. It offers a framework to assess anumber of influences and can be useful for businesses to develop effectivestrategies.Looking at the PEST model we can see how it applies to Tesco and howthe four types of environmental influence have affected the company overthe past 3 years as discussed in this essay.Political- Regulations imposed by the national government in South Korea
5. 5. has affected TescoEconomic- The economic downturn in the UK, its largest market hasaffected TescoSocio-Cultural- The need for the change of skill composition of its labourforce in Asia has affected TescoTechnological- The influence of new and changing technology onstrategies has affected Tesco in the UK and abroadIn conclusion Tesco had to adapt to the changes in its external environmentwith profits and market share both being down and competition increasing.In doing so it has opened itself up to both threats and opportunities. Thebiggest threat to the company I believe comes from rivals such as Aldi,Lidl and Amazon. Overall though it seems the company has a clear plan inhow it should move forward and is doing the correct things to stabilise andgrow the business. I think it will take time for the changes the companyhas made in the last few years to show in its profits and that it is still toearly to say if these changes have been a success or not. It seems clear thatTesco is very well aware that it has to adapt to constantly changingexternal environments and that is a big positive for the company. The factit has taken the lead with its Asian Training academy, is trying to placeitself at the heart of the community in South Korea, is investing big sumsof money in digital technology and recognises it has to offer better valuefor money in the UK means the future should look good for the companyand that Tesco remains one of the worlds largest supermarkets.
6. 6. has affected TescoEconomic- The economic downturn in the UK, its largest market hasaffected TescoSocio-Cultural- The need for the change of skill composition of its labourforce in Asia has affected TescoTechnological- The influence of new and changing technology onstrategies has affected Tesco in the UK and abroadIn conclusion Tesco had to adapt to the changes in its external environmentwith profits and market share both being down and competition increasing.In doing so it has opened itself up to both threats and opportunities. Thebiggest threat to the company I believe comes from rivals such as Aldi,Lidl and Amazon. Overall though it seems the company has a clear plan inhow it should move forward and is doing the correct things to stabilise andgrow the business. I think it will take time for the changes the companyhas made in the last few years to show in its profits and that it is still toearly to say if these changes have been a success or not. It seems clear thatTesco is very well aware that it has to adapt to constantly changingexternal environments and that is a big positive for the company. The factit has taken the lead with its Asian Training academy, is trying to placeitself at the heart of the community in South Korea, is investing big sumsof money in digital technology and recognises it has to offer better valuefor money in the UK means the future should look good for the companyand that Tesco remains one of the worlds largest supermarkets.