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Tesco: Assessing the change implications of Tesco’s Rapid International Business process.

| January 21, 2017

Executive summary

Change is inevitable in any organization that aspires to grow. As an organization, Tesco has diversified its operations and extended into new markets in various countries such as China, Japan among others. However, its largest market base is still in the United Kingdom. This paper discusses the implications that the company’s rapid internationalization has had on its operations.

Penetration into new and undiscovered markets which seem unattractive to many retailers and selling for low prices is the key strategy employed by this organization in its expansion process. They are able to charge these low prices due to the numerous benefits of economies of scale they enjoy due to mass production and sale. This strategy however, does not lack challenges just like any other strategy employed by other organizations. For instance, the competitors in the new markets can also reduce their prices thereby limiting the market to new entrants such as Tesco. This is especially so in large emerging markets such as China and Japan.

This paper also addresses the need for change and factors that have contributed to change at Tesco. There are a number of reasons why change is important. For instance, in order to ensure it remains competitive, some aspects of the organization have to change. The factors which drive change in this organization include political factors, social factors, technological factors, economic factors and even its objectives as an organization. The change process in this organization receives support from all the levels of the organization and the goals and vision are clearly communicated to the members. This is evidenced by its exemplary performance. Despite the numerous challenges faced in the change process, it has remained afloat and the benefits of the change are evident through its continued expansion. This paper exhaustively explores the change process at Tesco, analyzes the situation and makes suggestions that the company can use in implementation of the change.

Introduction

Tesco is a general merchandising retail chain and an international grocery store. Founded in 1919, it has grown over the years and is currently operating in over 12 countries globally with a total of 530,000 employees. In 2012, it had £3.03 billion in profits and £59.4 billion in turnover. Most of its revenue (65%) comes from the United Kingdom. However, other places such as Asia, United States and Europe also are responsible for a large portion of its revenue (Tesco, 2012). It operates under different brand names, which include Superstore, Express Extra and Metro. It sells about 40,000 food items in its superstores, clothes and other nonfood items. It also owns petrol stations and offers personal finance services such as life insurance. Its expansion has placed it at a top position globally and currently is ranked as the largest retailer in Britain and as the third largest retailer globally (Lowe et al., 2012). The own-label products of the company are grouped into three segments namely: the value level, normal level and finest level products. Despite the extensive development of the retailing and nonfood services, Tesco has undertaken huge investments internationally in a bid to ensure its continued growth. To ensure efficiency in operations and costs in its international operations, it has incorporated IT solutions to facilitate business processes (Miozzo et al., 2012). This paper provides an in-depth analysis of Tesco’s rapid internationalization.

Situation and Culture

Every organization has its own culture which either serves to identify its employees and customers or serves to ensure efficient running and cohesive relationships among the employees (Maitah, 2010). Tesco’s culture is distinctive through its numerous corporate social activities. These demonstrate its ideologies and values such as honesty, responsibility and fairness. This sense of social responsibility drove the organization into stating up supermarkets in areas where other supermarkets would not go into due to their native nature.

At Tesco, there are string bonds among the staff and customers. This has been quite instrumental in contributing to wards employee job satisfaction and offering services that are satisfactory to customers. These relationships have ensured efficient operations within the organization due to the social groups formed (Tesco PLC, 2014).
There are shared values upheld by the staff thereby ensuring a reduction in conflicts among them. This also encourages loyalty of the staff to the organization thereby ensuring its good performance is sustained. Lastly it helps them get a better understanding of the customers’ needs (Tesco PLC, 2014).
Tesco has a flexible work environment, which ensures an increase in employee participation in various roles and decisions and also enhances their adaptability to possible changes within the organization. An inflexible work environment would in most cases lead to resistance from the employees, thereby limiting their productivity and innovation. In the long run, it will affect the performance of the organization (Tseng, 2011).
The management practice undertaken by the organization tends to be in line with theory Y assumptions. In this theory, the management believes that the employees view their work as normal and will aim at obtaining additional responsibilities in their places of work (Russ, 2011). Given the right conditions, these managers believe that workers will be self-driven and work efficiently. Therefore, there will be joint decision making in regards to setting of objectives and development of strategies required to achieve these goals. Also these managers will delegate most duties and promote team work (Lowe et al., 2012).
Even though the managers at Tesco have incorporated some of these propositions in the daily management of the organizations activities, it may not entirely lead to efficiency. This is because of the extensive number of the subordinates one manger supervises making it difficult to use the approach (Benfari, 2013). Also, tasks allocated to the subordinates do not need specialized skills hence continued supervision by the managers is required in order for them to issue direction and ensure continuity in a bid to achieve the set goals of the firm (Inman et al., 2014 ).

Drivers of change and the organizations stage in the change process

There is always need for change in any organization, which is usually propelled by a variety of factors, which is also the case at Tesco. This section outlines the different factors that have contributed to the need for change at Tesco. It also addresses the stage of change in which the company currently is.
One of these is the changing political environment. New legislations come up every day and therefore it needs to conform to these standards in order to avoid any legal suits against them. Legal suits may affect its cash flows as a majority of people may claim compensation. Issues also such as political instability may affect the operations of the organization (Lowe et al., 2012).
Economic factors are also responsible for the changes. Factors such as economic crisis and fall in demand for goods may affect the cash flows adversely as sales will slump. This therefore poses a need for diversification of its operations hence a presenting a need for change (Benn et al., 2014). As the company expands its operations, it manages this risk because when the risk is high in a certain market, there is another market with stable economic conditions (Polak et al., 2011).

Social factors also contribute to this. Customer loyalty is a key social factor needed to ensure growth and sustainability of any business (Mahatma et al., 2013). For instance, news that the beef burgers from Tesco had horsemeat adversely affected the image of the organization and lowered the customer loyalty (The Guardian, 2013). This therefore drives for change as it has to ensure those who were affected are compensated and that corrective action is taken so no such occurrences are experienced in the future. Changes in the marketing strategies therefore are needed in order to restore the customer base (Anderson & Swaminathan, 2011).

It can also be argued that technological factors are responsible for these changes (Hitt & Tambe, 2012). Due to Tesco’s extensive operations all over the world, it needs to adopt new technological advancements in order to ensure efficiency in its operations such as production and marketing. Issues such as social media marketing through twitter and Facebook should be considered in order to ensure they meet their target audience (Tuten & Solomon, 2012). Online shopping channels should also be enhanced further (Plunkett, 2009).

At present, Tesco has undertaken numerous steps towards the change process. It has diversified its operations in order to prevent losses due to economic factors in one area. For instance it produces products such as petroleum and food products, both of which have inelastic demand (Tesco PLC, 2014).
It complies with both the legal and ethical requirements especially in regards to food products and also compensates affected individuals in order to avoid law suits which could harm its operations. Also, the organization has undertaken numerous technological advancements in its operations in order to ensure its operations are well managed and that their customers are served efficiently (de Kervenoael et al., 2011).

With reference to the j-curve model, there are stages which an organization goes through in the change process (Grabenwarter & Weidig, 2005). These include:
• Plateau: At this level there are minimal disruptions in the organization.
• Cliff: This stage is characterized by a lot of anxiety and uncertainties surrounding the new process.
• Valley: At this point, production is low and there are a lot of frustrations in the work place. It is the most critical part as it determines whether the change will be taken to completion.
• Ascent Stage: At this stage, the benefits from the development are reaped. There are no challenges at this point and the limited challenges faced can be easily resolved.
• Mountaintop: This is the final stage. Here, both productivity and performance have been improved.
According to the j curve model, Tesco is at the ascent stage. This is because some of the benefits from the internationalization strategy are already being ripped by the company (Lowe et al., 2012).
Whether there is a strategy for this planned change or is it a response to a problem.
For Tesco, the changes are both in form of a prior vision and as a response to changes in the issues in the market. Tesco has two key strategies which it employs in a bid to achieve its goals. These are:
“How Tesco sells for less”- Tesco‘s goal is to sell large volumes of a wide range of products and services. In order to achieve this, they make use of the economies of scale benefits derived from producing and selling in bulk. This therefore implies that it can lower its prices hence sell its products globally at competitive prices (Tesco PLC, 2014). “Steering wheel” –this is related to its primary areas of concern. These are operations, people, financial and customers. Of all the four areas of concern, the customers are the most important. Tesco therefore, has ensured that the relationship between them is cordial and built on a trust basis thereby securing their loyalty. It has ensured it provides quality products at very low prices and also that there is professionalism in service delivery to the customers (Bather & Tucker, 2011).
The increase in competition in Tesco’s major markets is the main problem that has also led it to implement the internationalization strategy. With companies like Wal-Mart and Carrefour also struggling for the market share in the UK and other main markets, Tesco has had to consider expanding to other regions where there is less competition (Ryu & Simpson, 2011).
Exploration of the problem to be addressed
Whereas Tesco has successfully established itself in the many countries and is generally performing well, there are several problems it faces that ought to be addressed. This will improve the company’s performance and give it an edge over its main competitors in the market. These issues are discussed hereunder.

Over dependence on the UK market

Despite its extensive expansion to other market areas globally, its profits still largely depend on the UK market. About 73.8% and 65% of its profits in 2003 and 2009 respectively came from its UK market (Palmer, 2012). Even though this is not a problem in the short run, it may affect its operations in the long run if its competitors such as the Morrison’s group expand their operations and market share (Benn et al., 2014).
Debt
International expansion is expensive hence requires heavy cash flows used for marketing and investment purposes. Therefore, Tesco requires huge cash flows and these are raised through borrowing (Randall & Seth, 2011). The repayment of these debts has further been worsened by the economic downturn and has become expensive overtime. Its aggressive expansion activities reduce the cash available for financing other activities in the organization (Benn et al., 2014).

Acquisitions

Due to its large size, and wide range of products, Tesco can easily take over other firms, especially in the United Kingdom. However, there is a risk posed by it turning into a serial acquirer since these actions will lower its quality, brand visibility and even earnings. This therefore should be addressed and a different expansion strategy considered (Johnson & Turner, 2010). Aggressive expansion into large markets such as China and Japan may lead to a decline in returns due to reasons such as the existing economic conditions in these markets, reactions by competitors and failure of the company’s strategy (Benn et al., 2014).
The key players and what each player may lose or win
The key players here include:
• Competitors- these are most likely to lose their market share due to an increase in Tesco’s market share. Some of its competitors include ASDA, Carrefour S.A, Safeway Inc. and the Royal Dutch (Palmer, 2012).
• Government- the governments in various countries where Tesco operates would most likely gain additional revenue from the taxes paid in by Tesco (Johnson & Turner, 2010).
• Customers- the consumers will benefit due to quality products at cheap prices since this is the main aim of Tesco. As the company seeks to gain a larger market share, it will be beneficial to clients (Anderson & Swaminathan, 2011).
Articulation of the vision to the members or the organization
As an organization, Tesco has a clear mission and vision. With a massive workforce of 597, 784 employees (as of 2013) there are strategies that are put in place to ensure that every one is at par with the organization’s mission and vision (Tesco PLC, 2014). The vision of Tesco is to be valued by the customers they serve, the communities in which they operate, colleagues and the shareholders. The organization seeks to transform lives through innovative products and inspire future generations. In all the 12 countries where Tesco operates, the company is valued and appreciated. The people are served in the best regard and they are loyal clients. This is a clear indication that the vision of the company has been articulated by the members of the organization (Taylor, 2014).
The level of support within the organization at each level
For the change process to be efficiently implemented in an organization, it is vital for all parties to be equally involved. This will reduce resistance and facilitate an easy transition from the state prior to the change to the state after (Kotter, 2007).

Generally, there is extensive support from the various levels in the organization at Tesco. For instance, the top level management makes decisions in regards to the possible areas of expansion. There have been minimal or no reports of resistance to internationalization at Tesco (Taylor, 2014). This means that as the company implements these strategies, it takes all the necessary measures to ensure that all the parties that are likely to be affected are well informed of the need for the change and the process that will be undertaken in the change process (Benn et al., 2014). Other levels in the organization, including the middle and lower levels, are also supportive of the changes (Taylor, 2014).

Other key players to be consulted

Apart from the parties within the organization, it is also vital for the company’s management to ensure that it consults other external stakeholders that are likely to be affected by the change (Kotter, 2007). There are different groups that need to be consulted. One of these groups comprises of the company’s creditors. These are the financers who facilitate the change process. Hence, their approval is needed because they need to certify that the expansion is profitable and that their funds will not be put in risky businesses (Bennett & Bush, 2013). Shareholders also have to be consulted. These are the owners of the business hence their interests must be factored in any decision making process. Their consent must be given before the expansion is undertaken. The governments of the home country and the target country into which the company intends to expand (Liguori, 2012). Before entering into any new markets, there are legislations set which must be observed. Compliance with these laws is needed before they can set up their operations in any country.

Recommendations for forming or not forming a coalition

It would be optimal for Tesco to form further coalitions with other organizations. This is because it will benefit in a number of ways. For instance, there will be an acquisition of additional skills from the company with which it is partnering. This also applies to other tangible and in tangible resources that might have cost the company a lot to acquire (Hogg et al., 2012). The potential market for Tesco will increase at a faster rate. By forming merger with companies that have already established themselves in the market, Tesco will automatically inherit the market share of the other companies. This is as opposed to a situation where the company could have entered the market on its own (Matsushima et al., 2013). Another advantage is that there will be improved information access and sharing, especially information about the markets being targeted (Hogg et al., 2012).
Whereas there are benefits that the company can get by entering coalitions with other companies in expanding its operations, there are also several limitations that it can be exposed to as a result of this. For instance, there can be conflicts in terms of how profits are shared among the companies involved (Matsushima et al., 2013). As a result of varying organizational cultures and structures, entering coalitions can also limit employee productivity as employees as there will be a conflict in the way they operate. This challenge is usually mostly felt in the early stages of the coalition (Benn et al., 2014).
Recommendations on useful tools for managing change at the organization
Generally, it is difficult for any organization and its employees to adjust to change. It is therefore recommended that an organization uses a model as this will give the leaders a guideline on how to effect this change and make it acceptable (Boje et al., 2012). There are several models that have been suggested by researchers to help in change management. One of these is Kotter’s eight-step model, which is summarized in detail in the table below (Kotter, 2007).

By following the steps that have been suggested by Kotter above, there is a high likelihood of succeeding in the change process. However, critics have faulted the model for being mechanistic and assuming that all organization can chronologically follow these steps. It fails to acknowledge that organizations differ (Liguori, 2012).

Additional advice

It is important to see to it that there is e continued success in operations of the organization. Presently, Tesco has greatly diversified its operations. Though it can be seen as a good strategy for business in terms of spreading risk, it can choose to focus and specialize in a few of them. The expansion of the nonfood operations offers a greater potential than the others and hence it can choose to concentrate in this area due to the extensive demand for these products. This however, can be adversely affected by the economic environment. Therefore, an extensive assessment of potential risk factors should be made before investments in this unit are undertaken. Of importance is to note that sales here are generated by the consumer confidence levels and ratings. At present, these are quite low. There is also an increase in the demand for organic and natural product in the United Kingdom. Tesco therefore should take advantage of this opportunity to conform to these lifestyle changes and develop products in order to tap into these new markets. This would be more efficient if Tesco could lower the costs of production in order to ensure that the product prices are not so high and hence are available to the consumers.
In conclusion, Tesco can penetrate into new markets such as the United States through its current penetration strategy into undiscovered markets as this has been effective in the past and still is. This is because the current retailers are not willing to delve into these markets. This would also require an extensive risk assessment especially in regards to transportation and supply as this would affect the cash flows .hence, it would be effective to use a clustered approach in development of stores instead of placing them indiscriminately. If it can penetrate the fresh foods market in the United states then they will continue to be successful as the demand for food is relatively inelastic and will not be adversely affected in case of economic downturns.

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