EXTERNAL ENVIRONMENTS ESSAY -BARRIE COOK

TESCO

All businesses are affected when changes happen in their external environment, this essay is going to look at how these changes over the past three years have affected Tesco plc and what the company has been doing to adapt to these changes. The threats and opportunities that arise from this will also be discussed.Tesco is a British multinational grocery and general merchandise retailer. It was founded in 1919 by Jack Cohen from a market stall in London's east end and first floated on the stock exchange in 1947. Since opening its first supermarket in Maldon, Essex in 1958 it has grown dramatically and now operates in 12 countries around the world and employees over 530,000 people. In 2012/13 Tesco plc posted a group trading turnover of £72,363 million, an increase in growth of 1.3%, for the same year its group trading profit 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 the most important economic.

The recent downturn in the economy, especially in the UK, has certainly had a negative impact on Tesco as people don't have the money to spend like they used to and it is undoubtedly a major factor in the growth of trading profit being down.The UK is Tescos biggest market as it contributes more than two-thirds of group revenue so this along with the fact that in Britain Customers have cut back most on non- food items and that Tesco offers a higher proportion of these items compared to its rivals, means the company was hit hard by the economic downturn in the UK. This downturn has lead to government austerity cuts, rising unemployment and falling real incomes all which means customers are seeking cheaper ranges and this has lead to the emergence of so called “hard” discounters such as Aldi and Lidl as a real threat to Tesco. The company is losing market share to these discounters at the bottom end of the market and to Waitrose at the top end and with

recent industry data still showing a share of the market year on year decline for Tesco it knows it has to react to these threats. Tesco's CEO Philip Clarke said on Aldi and Lidl in a recent interview “you cant ignore them. No retailer can, you have got to have sharper prices and better quality”. In a bid to lure back shoppers he has also pledged to cut prices between 10 and 30% on more than 3,000 products, mainly food. Heavy investment in store upgrades, more staff, its online offer and product ranges are all part of Tesco's recovery plan and in 2012 the company launched its 'Everyday Value' range which was designed to compete with the likes of Aldi and Lidl. Only time will tell if these measures will be a success and if the company can regain some of the market share it has lost but it has reacted to the changes in its economic environment and there are positive signs such as the everyday value range growing fast and being up 10% like for like.

Another one of the 12 countries the Tesco group operates in is South Korea, which is its biggest market outside the UK. It is in this market that Tesco has seen another change in its external environment affect the business, this time it is politically with changes in regulations by the national government having a serious impact on the company. It runs supermarkets under the Homeplus brand and the company finds itself in the middle of a long running political battle about whether supermarkets are crushing small markets and corner shops. The South Korean government had previously enacted legislation that limit the areas where supermarkets can open but worse was to come for Tesco. In 2012 new regulations were introduced that have restricted opening hours for big retailers. Tesco stores now have to close for 2 Sundays a month and on the Sundays which they can open their opening hours have been restricted. Sunday is the biggest trading day in South Korea. The company estimated these regulations would cut its profits by about £100 million a year. These new regulations are a blow to Tesco's operations in South Korea and although they have no choice but to comply with these regulations they are very keen to alleviate these political fears by portraying itself as fostering a sense of community in the country, in the hope these regulations will be relaxed. To do this it runs cultural centres in stores which offer serviceslike English lessons and violin classes so although these regulations are a big threat to the profitability of the company they have forced the Tesco to embrace the opportunity to try and engage the community and to be seen

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 South Korea and Asia as a whole, the skill composition of its labour force has to be developed and nurtured. The company knows that if it is to expand across Asia it needs fully qualified and trained staff to achieve this. Philip Clarke CEO has said “We have plans to expand across Asia in years to come. We need to develop our local talent”. Tesco has been pro-active to these changes in its socio-cultural environment in this part of the world by opening a training academy in South Korea. Over £30 million has been invested in the water front facility which opened in 2011. Tesco has over 100,000 employees across Asia and the plan is for around 24,000 of these staff to attend training courses at the academy each year. Courses in the academy range across all of Tesco's operations and staff will be trained, mentored and connected with colleagues across the world. Also its important to the company that staff have a understanding of its roots so the academy boasts a Tesco museum that is designed for exactly that objective.The company has been pro-active in taking advantage of this opportunity to be at the forefront of developing staff in this market and it was the first FTSE 100 company to open such a training academy in Asia. Opening this academy should help build Tesco and its reputation in what is already a lucrative market for the company.

The technological environment of business is a constantly changing environment and Tesco are aware that they need to react quickly to these changes. One change it has reacted to is the increasing popularity and growth of the tablet market. In a risky strategy in September 2013 Tesco launched its own tablet computer called the Hudl. The Hudl is a colourful, android operated tablet with a 7inch HD widescreen display. It retails for £119 though clubcard customers can get it for less than £100. It remains to be seen if they can establish a place for the company in a marketplace that is dominated by the might of Apple and Amazon and if they can compete with these companies going forward as tablets are evolving constantly. An opportunity that Tesco have seen and are taking advantage of is a link

between their new tablet and their online shopping website as the Hudl has a built in Tesco button which allows users to shop, which should see an increase in online sales. Also Tesco see the launch of the Hudl as a way to try to reconnect with its customers as the device was built from scratch and customer consulted. Tesco hope the Hudl will get a good reception from shoppers and reviewers which will give the company respect in the tablet market which it can build on going forward. As Mike Mcnamara Tesco Chief Information Officer said “You should expect technology to be a continuing part of our relationship with customers”As Tesco battles declining sales in traditional stores the company has plans to accelerate global investment in digital technology. This includes launching new digital music and book services in the uk, via digital format launching clubcard in China and expanding online food shopping into Bangkok and Shanghai. Tesco realises how important it is to react to these technological changes around the world and in 2013 invested £492 million in technology which is 3 times more than in 2010. Again stepping into some of these markets will put Tesco into competition with some big companies already established in them. In the UK Tesco currently competes with Lovefilm and Netflix after buying blinkbox in 2011, blinkbox allows customers to download film and television programmes over the internet. The plans to launch blinkboxmusic and blinkboxbooks will see Tesco in competition with the digital giant Amazon and this highlights how ambitious Tesco is being. The threat therefore is again that Tesco struggles for market share as it bids to take customers away from more established companies. Tesco controls 45% of the online grocery market in the UK but its online offer elsewhere in the world has been limited so far. The plans to roll out online grocery shopping to the big Asian cities is a great opportunity for Tesco to become the market leader in these countries as it is in Britain.

A model that is commonly used to look at the external environments that affect business is the PEST model. It offers a framework to assess a number of influences and can be useful for businesses to develop effective strategies.Looking at the PEST model we can see how it applies to Tesco and how the four types of environmental influence have affected the company over the past 3 years as discussed in this essay.

Political- Regulations imposed by the national government in South Korea

has affected Tesco

Economic- The economic downturn in the UK, its largest market has affected Tesco

Socio-Cultural- The need for the change of skill composition of its labour force in Asia has affected Tesco

Technological- The influence of new and changing technology on strategies has affected Tesco in the UK and abroad

In conclusion Tesco had to adapt to the changes in its external environment with profits and market share both being down and competition increasing. In doing so it has opened itself up to both threats and opportunities. The biggest 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 in how it should move forward and is doing the correct things to stabilise and grow the business. I think it will take time for the changes the company has made in the last few years to show in its profits and that it is still to early to say if these changes have been a success or not. It seems clear that Tesco is very well aware that it has to adapt to constantly changing external environments and that is a big positive for the company. The fact it has taken the lead with its Asian Training academy, is trying to place itself at the heart of the community in South Korea, is investing big sums of money in digital technology and recognises it has to offer better value for money in the UK means the future should look good for the company and that Tesco remains one of the worlds largest supermarkets.

has affected Tesco

Economic- The economic downturn in the UK, its largest market has affected Tesco

Socio-Cultural- The need for the change of skill composition of its labour force in Asia has affected Tesco

Technological- The influence of new and changing technology on strategies has affected Tesco in the UK and abroad

In conclusion Tesco had to adapt to the changes in its external environment with profits and market share both being down and competition increasing. In doing so it has opened itself up to both threats and opportunities. The biggest 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 in how it should move forward and is doing the correct things to stabilise and grow the business. I think it will take time for the changes the company has made in the last few years to show in its profits and that it is still to early to say if these changes have been a success or not. It seems clear that Tesco is very well aware that it has to adapt to constantly changing external environments and that is a big positive for the company. The fact it has taken the lead with its Asian Training academy, is trying to place itself at the heart of the community in South Korea, is investing big sums of money in digital technology and recognises it has to offer better value for money in the UK means the future should look good for the company and that Tesco remains one of the worlds largest supermarkets.