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Tesco Value and Retail Chain Analysis

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Introduction The notion of the ‘value chain’ was first created by Michael Porter. The concept of having a value chain in any business is for it to develop a sustainable competitive advantage in the industry that it operates in. All organizations entail various activities that link together to create the value of the company, and together these activities form the organisation’s value chain. The Value chain of any industry always begins with the production of raw materials and ends when the final product is delivered to the consumer.

The primary aim of the value chain framework is maximize value creation while minimizing the costs involved.

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The value chain analysis essentially entails the linkage of two areas. Firstly, the value chain links the value of the organisation’s activities with its main functional parts. Then the contribution of each of the part to the overall added value of the business is assessed. To conduct a value chain analysis, the organisation’s activities are divided into primary and supporting activities.

Primary activities are related directly with production, whereas, the supporting activities such as human resource management provide the background essential for the effectiveness and efficiency of the firm. TESCO

Analysis of Modern Retail Chain –The TESCO Case Though the modern retail value chain hasn’t changed much since 1920s, the concentration in retailing space has been a key development. Also, on the supply side, new firms have entered and successfully established themselves in product manufacturing firms. This further resulted in the loss of ability to capture Potential Industry Earnings by demanding a payment in excess of its cost. In mass market retailing the trend in market share show that TESCO has consistently outperformed its competitors and has maintained its number 1 position in UK market.

At this juncture, it is intriguing as to Why TESCO has been successful in creating value for customers and capturing it? From here on, we analyze how TESCO competes aggressively to capture value from its competitors and suppliers. Further, the essay will delve into how TESCO cooperates with its competitors to expand the Potential Industry earnings and create value for the whole chain. TESCO’s Value Capturing Strategies TESCO believes in being the “lowest priced” firm in the mass market segment. For any mass market retailer to adopt the low cost paradigm, minimizing costs is a key challenge.

Hence, while negotiating the terms of trade with firms (specifically the suppliers), TESCO maintains an adversarial and “tough” negotiating stance. TESCO also ensures that it competes aggressively and captures value from its competitors such as Sainsbury and ASDA. For ease of analysis, we denote value capturing methods from suppliers as value Capture – upstream. Similarly, value capture from competitors is termed as value capture- downstream. Value Capture – Upstream Competition in any segment reduces the “buyer” or “supplier” power in that segment.

Understanding this importance of competition between suppliers, TESCO maintains two or more suppliers for each product that it sells. This helps TESCO to negotiate the lowest possible price for each product. Inducing competition amongst suppliers helps TESCO to limit supplier’s ability to bargain and affect the terms of trade. Lack of supplier’s bargaining power prevents TESCO from “hold up” problems associated usually with single and powerful suppliers. While sourcing products, TESCO consolidates its requirements across all the stores in UK before placing the order to the supplying firms.

This helps TESCO to buy in bulk and consolidate its purchasing requirements across stores in UK. Since TESCO consolidates its requirement, it buys in huge quantity. The sheer volume of TESCO’s requirement makes it attractive for any supplier to have TESCO as its client. Value Capture – Downstream Competition from other retailers is also a key factor that affects value captured by TESCO. Since TESCO’s strategy is focused on being a “low priced” mass market retailer, gaining a large market share and protecting it is crucial.

To capture and protect its market share TESCO competes aggressively with its peers in organized low cost retail. TESCO seeing the aggressive growth in retail space, has acquired land in prime locations in all its key markets. This has served twin benefits for TESCO. First of all, TESCO now has ensured that it has land available for it to build stores if it considers expansion as the way forward. Secondly, it acts as a barrier to further expansion by competitors as they lack access to real estate in key locations. This helps TESCO in its efforts to capture value from its competitors.

Customer loyalty and repeat business helps to maintain market share and TESCO tries to lock in its customers by way of introducing loyalty cards, discount vouchers, cash back schemes and free home delivery. Further, TESCO has also diversified the product offerings from the more traditional “need” based products to more modern product lines such as home furnishing, banking, insurance and mobile telephones. With this TESCO is entering new niches, bringing unconventional products (such as banking) into the mass market retailing. This has helped TESCO to retain and grow its market share in these new avenues of retailing.

We have seen how TESCO’s adversarial action helps to capture value from the suppliers and competitors. However, TESCO also cooperates with suppliers and competitors in specific areas to jointly increase the value created by the whole chain. The essay now looks into value creation strategies employed by TESCO. TESCO’s Value Creating Strategies Value creation often entitles holding shares constant to raise profit for the whole segment. TESCO engages in cooperation with competitors. This is less evident and we assume somewhat tacit agreements in this case. Tacit Collusion

TESCO, ASDA and Sainsbury’s have constantly positioned themselves as “low priced” mass market retailers. There aggressive stance against competition has led to price wars and this has resulted in loss of value captured. To stop the Potential industry earnings from shrinking, these retailers employ tacit collusion so as to avoid competing on price. Holding shares constant in product categories and cooperating helps the whole segment to stop the Potential Industry Earnings from shrinking. References Lynch, R. (2003), Corporate Strategy, 3rd ed. , Prentice Hall Financial Times.

Cite this Tesco Value and Retail Chain Analysis

Tesco Value and Retail Chain Analysis. (2018, Jul 28). Retrieved from https://graduateway.com/tesco-value-and-retail-chain-analysis/

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