Micro-Economic Impacts on Tesco Plc

In this essay we ar going to evaluate the micro economic factors on the activities and performance of Tesco. Tesco Plc (2011) states, that the sell industry is a highly competitive environment. Tesco competes with a wide admixture of retailers of varying sizes and faces gaind competition from UK retailers as soundly as global operators in the UK and all oerseas. Failure to compete with competitors on argonas including toll, product range, quality and avail could have an adverse way out on the organisations financial results.Tesco aims to have a broad appeal on bell, range and store format in a way that al let outs them to compete in different grocery stores. There is a risk that Tesco whitethorn not deliver their stated strategy in full, particularly since, like all retailers the championship is susceptible to economic run throughswing that could affect consumer spending. 2. 0 The Extent of Competition in the Market Tesco is a multi-national grocery and general merchan dising retailer. By revenue, Tesco is the fourth abundantst retailer in the world after Wal-Mart, Carrefour and Metro.With 4,811 across 14 countries in regards to profit, Tesco is the assist largest retailer in the world. In the UK, Tesco operates in an oligopolistic securities industry competing against three study retailers Asda, Morrisons and Sainsburys. Oligopolistic provenderstuff places are those which are dominated by a midget radical of larger trustys with several little firms also competing in the commercialise with nonage market make out. The concentration ratio of the retail market is 476. 2. come in 2. 0. 1 Comparing the Grocery Market (Preston, 2008) Preston (2008) states, Tesco are the market drawing card with 31. % with Asda, Sainsburys and Morrisons having a market share of 16. 9%, 16. 4%, 11. 5%.This means theoretically Tesco have monopoly power at heart the market but due to the intense competition which is apparent, they are not satisfactory to ex ploit their market power and discriminate against some other firms as healthful as customers. save, there are still allegations that the major players inwardly the market collude with one another to cause higher levels of barriers of entering and nurse prices at a level which benefits all of the major firms. This protects their fleck within the market and allows them to set rices at any desirable level.With this happening these major players make it extremumly difficult for start-up businesses to enter the market. 3. 0 Market assurance In 1998 the market share for the grocery market showed that Tesco had 21. 8% of the market share. Asda had a market share of 12. 1% with Sainsburys share at 19. 9%. Morrisons and Safeway controlled 13. 3%. This gave a concentration ratio of 466. 1. However in figure 2. 0. 1, it shows that Tesco started to dominate the market and saw a advancement in their market share from 21. 8% to 31. 4%.Presumably, within these 10 years Tescos used its ec onomies of home plate to gain this extra market share. With Tesco having a great majority of the market share they operate in, it allows them to possibly price discriminate. The way in which Tesco could do this is by having such a high market share they are capable of forcing competitors disclose of business and therefore, leaving only them to provide the products or services within that area. In addition to this, Tesco can under-price its products and services as with a greater market share they can reach economies of scale.Economies of scale arise when cost per unit of measurement falls as output increases. With having economies of scale Tescos can wherefore be more(prenominal) productive than its competitors and supply more to its customers at rectify prices. For example if Tesco reach economies of scale they can get more from their suppliers with sight buying allowing them to supply at lowers prices. By doing this poses a little terror to small businesses that can be undercut by the competition. With a 30. 1% of the market share Tesco definitely do have some market potency within the market via the instruments stated above such as the potency to undercut competitors.However, they are not a monopoly and therefore, cannot fully price discriminate and set prices. As with doing this its custom see going to other companies within this market as the products and services they supply are similar. 4. 0 Economies of weighing machine Economies of scale are when higher output leads to lower average cost such the average cost of takings is reduced due to the increase in total output. Tesco has a very large scale business, first step in the altogether stores daily. There are currently more than 4,811 stores of Tesco worldwide.Since they are hatchway new stores regularly, they have to produce more. So as the volume of production increases, their average cost per unit has decreased. This has given Tesco a huge emolument over the other supermarkets e sup ernumeraryly those that are smaller in size. The large size of the firm means that it can benefit from further economies of scale in areas such as bulk buying, transportation, distribution, marketing and technology. A have of their sales strategy is that they encourage customers to buy in bulk.They have special offers for that, such as buy one get one one-half price etc. These offers compel customers to buy more quantity, which in rise gives Tesco the advantage of selling more and consequently buying more, which in address gives them a lower average cost. In an oligopolistic market, although it is difficult to prove, the likelihood is that the firms with majority market share collude with one another for the benefit of themselves. They result do so to maximise their profits as well as create higher levels of barriers of entry for new firms trying to enter the market.This has without delay become illegal in the UK by the 1965 Restrictive Trade Practices Act. 5. 0 Barriers to Ent ry Barriers to entry are the means by which Tescos potential drop competitors are blocked out. Due to Tescos monopolistic characteristics, Tesco entrust be able to enjoy higher profits in the long numeration as rivals have not diluted market share. Three barriers of entry are Patents are legal property unspoileds to prevent the entry of rivals. They are generally valid for an average of 20 years and give Tesco the right to prevent competitors from using patented products.Tesco can sell licences to competitors for a stated fee. Using Advertising and Marketing Tesco have developed customer allegiance their club card has played a pivotal role in their customer loyalty. Thus making demand less sensitive to price due to advertising leading to an outward shift in demand. Tesco rent in brand proliferation, as it is a firm which sells a commodious range of products, this may portray Tesco differently to consumers. This is common barriers to entry in these types of markets as it is non- price competitions for household good. 6. 0 ushers Five ForcesIn lay out to evaluate the competitive environment surrounding Tesco, I shall utilise Porters five forces model illustrated in figure 2. Figure 6. 0. 1 Porters Five Forces Model (Zan gum olibanum, 2011) 6. 1 Bargaining authority of Buyers 0 The bargain power of buyers is fairly high. 1 Products that have a slight differentiation more standardised, the change overing cost is considerably low, allowing the buyers to switch from one brand to another easily. 2 Prices are forced down by buyers power. For example, if bread is too expensive in Tesco, buyers volition use their power and move to Asda.Supermarkets have a condition approach to price setting, stopping them from destroying each other in a profit/price war. 6. 2 Bargaining Power of Suppliers 3 The bargaining power of suppliers is fairly low. 4 Suppliers fear losing contracts with major supermarkets, hence pose retailers like Tesco in a dominating position. Nego tiations are therefore positivist in order to get the lowest price achievable from the suppliers. 6. 3 Competitive Rivalry 5 The amount of competitive rivalry in the food and grocery retail industry is extremely high. 6 Tesco faces extreme competition from its key competitors Asda, Sainsburys and Morrisons.Organisations are competing with each other over price, products and promotions sporadically. 7 Discount superstores such as Aldi and Lidl have taken over the market in current economic times, due to the recession. Keynote (2010) states, that during 2008, they enter sales of over 25%. 6. 4 Threat of New Entrants 8 The threat of new entrants into the food retail industry is low. 9 Tesco and other supermarket chains put up considerable barriers to entry. Starting a new supermarket chain has barriers imposed on it, implicitly or explicitly, by the animate organisations.0 According to Mintel (2010) Tesco, Asda, Sainsburys and Morrisons account for 80% of all shopping carried out in the UK. 11 In order for new entrants to establish themselves they will have to produce something at an exceptionally low price and/or high quality. 6. 5 Threat of Substitute Products and Services 12 The threat of substitutes in the grocery retail market is considerably low for food items whereas its medium to high for non-food items. 13 The substitutes for these major supermarkets are smaller firms such as convenience stores but these are not seen as a threat to Tesco who offer high quality items at low prices.Tesco is however overcoming this threat by opening Express stores in small towns and city centres, in effort of becoming an obstacle for substitutes hoping to enter the market. 14 In current economic times, customers will be drawn towards discounted prices, thus Tesco is a threat towards specialist shops. Due to the rivalry between these supermarket chains, a highly competitive environment can be maintained, and one that facilitates consumers a greater deal than a proliferati on of small independent shopkeepers. 7. 0 mettlesome Theory and Interdependence Game theory and interdependence are twain linked together.Interdependence is when decisions of two (or more) businesses have an effect on the other firms profits. Then when looking into interdependence the investigation into what happens is game theory. As Tesco has the highest share of the oligopoly it in theory has the most power of the market. However a competitor such as Sainsburys could easily affect the dower share of the market Tesco has. This could be by Sainsburys lowering the prices of authoritative products and then with the decision that Tesco has to make, Tesco could end up losing either their percentage of share in the market or their profits.For example if Tesco decides to keep the price the aforesaid(prenominal) of an item which is on sale at Sainsburys then customers will decide to get the product from Sainsburys, thus Tesco lose money. However Tesco may also decide to lower the pri ce of the item for sale at Sainsburys, however Tesco may not advertise the sale item as well as Sainsburys so again they may beat a loss as not many people fill out that the item is for sale. Many other examples could be used for interdependence for Tescos.If a competitor of Tesco such as Sainsburys decided to save be because of the recession then Tesco could unexpectedly make more profits as a result. This is because Sainsburys could decide to save costs by miscue down the number of jobs and stop selling less profitable items. The effect this would have on Tescos would be positive. This would be due to the downswing in popularity of Sainsburys as a result of job losings around the country to save money. As big money companies gash jobs is always very unpopular, as a resultSainsburys customers may well go to its competitors such as Tesco and thus Tesco gaining more money from more customers. With Sainsburys losing customers in this example, the demand curve for Tesco would shif t to the right and as a result of more money being made the price level would be increased because of the increase in demand. 8. 0 goal and Recommendations From the above analysis, it can be said that Tesco maintains to embrace its leading position in the highly competitive retail industry in which organisations must follow both differentiated strategies and cost leadership.The core competencies of Tesco are line up with the competitive operating environment, therefore highlighting a positive future(a) outlook for the organisation. The company must constantly adapt to the fast changing circumstances. Strategy formulation should therefore be regarded as a service of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and bring to pass these actions.