Strategic Direction

This report discusses the actual and potential impact of information on the strategic direction of Tesco, a food and grocery retailer. This report also analyse the important of customer in Tesco and how they use Clubcard to earn customer loyalty. Tesco is the UK’s largest grocer and they not only offer fresh food and chilled meals but also increased sales in the non-food sector (Datamonitor, 2009).

Tesco know the basic principles of how to run a mass-scale, create value loyalty programme and had been proven and are still used today. Tesco can understand what their customer wanted by collecting data and with the simple marketing model for example ‘Every little helps’ and saying ‘Thank you’ to customers can achieve customer loyalty (Seth and Randall, 2005). In addition this report studied the interaction of five different forces that happen in the business using Porter’s Five Forces Model introduced by Michael Porter (1980). The benefit of using of IT and internet for online shopping also gives benefit where Tesco can gain more profit.

Implementation issue of strategy also explained for instance they have a problem when there was too much data and the problems with the data warehouses and how they create the solutions. This report also examined about the customer value in Tesco and discovered how they build a strong relationship to their customers. Lastly, the report concludes by recommendation that would be used by the organisation in order to maintain their growth in the food and non-food products. INTRODUCTION Information becomes a resource when it gives value to the organisation.

According to Garai (1997), all information started as data and it has to be converted into information, knowledge, understanding, communication and intelligence in order to be useful and powerful data. We look from the perspective of Tesco in order to understand the aspect of knowledge, information and data and how they apply in the organisation. Tesco had a 30. 7 percent share of the UK grocery market (Datamonitor, 2009).

It means that Tesco leading the market position and dominate the food and retailer sector. Tesco was the first UK grocer launched loyalty card and until recently they still use the information to mail customers every month Palmer, 2004). What is more, Tesco is the most successful internet supermarket in the world, the biggest grocer in the UK and grow very fast in financial services companies. There are three levels of the company products, value, normal and finest. Tesco also has gas stations and become one of the Britain’s biggest independent petrol retailers. (Datamonitor, 2008). Tesco very focus on customer data and they use data warehousing to analyse and organized data (Humby, Hunt and Phillips, 2003). From the data, Tesco can divide their product through customer segmentation.

Discount of particular product also given to their value or loyal customer base on the data mining. Many strategies have been use to get the customer loyalty. For instance Tesco used customer loyalty contract so that the loyal customer can be a long term stakeholder for example they launched ‘Student Clubcard’ and ‘Points on Petrol’ as marketing techniques to get more customers (Humby, Hunt and Phillips, 2003).  Tesco started collecting data on customer with process which took about seven to eight years and they not only analyse but make sense of it (Mutch, 2008).

Realistically Tesco try to develop individual into group target or put the groups into the data and make classification of customer. Tesco started from questions by asking customer not from collecting data where they use many useful capital customers and question (Mutch, 2008). They try to develop individual into group target and put the groups into the data. They make it in group to make different or using customer segmentation. Segmentation is making assumption and making decision knowing about customer. For instance in UK postcode is being used to do marketing.

In addition, Tesco has a very strong customer orientation. They put people strength ‘every little helps’ and offer products at affordable price. However, Tesco also has a range called premium product which has high quality store and high price. For instance, when Tesco produce it for the first time it’s only at the certain store and in wealthy area. Morover, through University of Kent and dunhumby Academy of Consumer Research help Tesco to produce analysis of loyalty card data and sales (Humby, Hunt and Phillips, 2003). Tesco can analyse data on customer with the profile who buy a product in every single shop.

Therefore Tesco can adjust how much they need to put in the shop base on the data. From club card and data analysis, Tesco can make history who is buying the product and in what time they are buying the product (Humby, Hunt and Phillips, 2003). Porter ;amp; Miller (1985) argued that organisations need to alert about the new IT. Tesco do a lot of marketing research not only on people but also analyse the data in what other combination in what other trend do something with it. Tesco became success because they came historically very good in different people.

Considering the popularity of online shopping in the UK, Tesco launched their Tesco. com in 2000. (Mintel Report, 2008). It gives the opportunity for the company to get new customers, earn better margins and save infrastructure costs. ‘ 1 shows that food and groceries have the highest percentage of purchase through internet. In addition, Tesco expanding their non-food range product in the internet through Tesco Direct like books, furnishings and home electricals. It increased sales rapidly by more than 50 percent in 2009 (MarketWatch, 2009).

As a result, it helps the company to drive sales when it offer product at low priced. Technological advances also help Tesco in their daily business operations such as self check-out machine, wireless devices, electronic shelf labelling and radio frequency identification (RFID) systems. As a result, this technology helps Tesco’s ability to increase the service and products at the same time controlling costs. It can be said that IT has taken up a central role or function in business strategy formulation. In terms of data warehouse, Tesco is a customer store based model.

It starts by gathering data to answer a specific set of questions then grow to take in further types of data. By having a centre warehouse, Tesco may develop more customers and they can order stock based on customer needs. The problem with data warehouse come out when the project is used as a technical which the purpose is to get all the data together and see what kind of questions can be asked (Mutch, 2008). Westerman (2001) argued about the best form of data warehouse for organisation with some preferring the smaller datamart. This is because it can reduce time and the data can be better appropriated to specific needs.

A Porter’s five forces focus at the external factors that impact to the company. The idea was based on the competitive advantage that came from the competence to obtain a return on investment that was better than the average of the industry sector (Johnson and Scholes, 2003). By using this tool as shown in ‘ 2, it may identify the problems facing Tesco including it examine the buyer power in relation to grocery purchases, the threat of substitutes from other competitors, grocery supplier power and the power of the customer.

Threats of new entrants The threat of new entrants is normally based on the market entry barriers. However, the market entry barriers exist when it is not economically for an outsider make a copy of the incumbent’s position (Porter, 1980). According to Ritz (2005), in the last 30 years, grocery market has been changed into the supermarket-dominated business that has been controlled by competitors including Tesco, Asda, Sainsbury’s and Safeway. As a result, it gives a great impact on the small shops like bakers and butchers.

It has a strong barrier for new companies to enter the grocery market due to high cost in developing supply chains. For instance Tesco invested a huge amount in advanced technology for the stock control systems and checkouts so it gives the impact for the new entrants. Bargaining power of suppliers The power of suppliers can be affected by grocery chains and fear of losing their business to the large supermarkets. Retailers pay a price of the good based on the suppliers demand. They do not get the goods if the retailers didn’t pay the price.

However, Tesco can dictate the price that small shopkeeper pay to the supplier. Therefore the supplier will be left with a small market if they do not reduce the price. Bargaining power of buyers According to Porter (1980), the more products that become standardized, the lower switching cost, therefore more power is given to buyers. Buyers will use their power of buying and move to other supermarket if prices are too high. Tesco’s loyalty card, Clubcard is one of the most successful strategies in order to gain more profitability.

Tesco focuses in fulfilled their customer’s needs by maintain their customer base for example give better choices, low prices, customizing service and continuous flow of in-store promotions. In addition, supermarket starts to sell non-food items when there is a large demand from consumers doing most of their shopping in supermarket. It provides supermarkets with a new market area like pharmacies and banking. Threats of substitutes There is a threat of consumers switching to alternatives when substitution capable to lower demand for a particular product (Porter, 1980).

For example Tesco has competition from other competitors like Sainsbury’s that able to provide substitutes for their products so it makes the prices down in both supermarkets. Tesco also try to gain small scale operations and opening Express stores both in local and city centres (Ritz, 2005). Bargaining power of competitors In many aspect of the market, Tesco has a big competitive rivalry from other competitors such as Sainsbury’s, Morrisons, Asda and Waitrose. They were competed each other through price, product and promotions.

Tesco’s express main rivals are the Sainsbury’s and the Co-op one way in which they compete through distribution with Tesco. This made Tesco more competitive in sustain customers where these businesses have stores. In addition, Tesco also compete with petroleum suppliers for instance Esso, Texaco, Bp and Shell. They are using the same principle to compete one another by having price wars and introduce their special branded fuels like high octane fuels. However, according to Ritz (2005), Tesco has large amounts of consumer information that can be used to communicate with consumer.

Innovation also can be seen in the development of trading formats due to changes in consumer behaviour, therefore UK grocery retailers have to be innovative to sustain and build market share. USE AND COLLECTION OF CONSUMER INFORMATION Tesco tries to acquire long-term loyalty from their customers through Clubcard. From the data collected on shopping patterns, Tesco could arrange their product in stores. For instance The Baby and toddler club has been specified among families with children and new babies.

The loyalty scheme also has a lot of purpose like customers receive variety of coupons and discounts that linked to a certain product. This will affect customer behaviour in spending pattern. Moreover, customers also have opportunity to pursue buying into financial and other services for instance by giving cardholder discounts for first time buyers. From the data that Tesco collected, they can detect the customers purchasing history. Tesco can provide customers with variety of products and range throughout the stores.

For example Tesco launches three brands there are ‘Tesco Value, Tesco and Tesco Finest’ and these are the three price quality positions and the priced accordingly at Tesco targeted customers (Dawson, Larke and Mukoyama, 2006). ‘ 3 shows the principles of Clubcard loyalty contract, it is simple but profound. Tesco promises their customer if they open a Clubcard account, they will get a lot of benefits and join Tesco to be a long -term stakeholder. Data that are collected by Clubcard is part of the contract. This concept also important for Tesco as a tool of their communication strategy to keep commitment between Tesco and customers.

In addition, Tesco launched Student Clubcard in September 1995 where it was based on the research among 600 students that think loyalty cards didn’t give any advantage to them and by August 1996, one in five UK students was a member, this made 4 percent of Tesco profit came from member of Student Clubcard. (Humby, Hunt and Phillips, 2003). However, students are not really engage with the loyalty card because they tend to move house for at least once a year, so it is difficult to keep track where they live. Tesco have difficulty to communicate with them effectively.

Other strategy that has been done by Tesco is giving points on petrol. If customer spent ? 9 on groceries, ? 1 was spent on petrol so Tesco get immediate effect on sales when customer want get more points so that they can filling up their tank especially from the male customers. (Humby, Hunt and Phillips, 2003). Tecso had a big problem when there was too much data flooded in 1995 because as the most successful retailer in the world, Tesco need to handle output of more 50 million shopping trips in three months and need to comprising more than two billion purchased items for more than 5 million Clubcard holder. Humby, Hunt and Phillips, 2003).

Tesco use the expertise from dunhumby to develop the strategy for data analysis. Tesco got huge or mass volumes of individual data of their value customer. At once a week, the analysts took 10 per cent of the data then they processed the data and applied the findings to the other 90 percent of the file, this process took time and need the intellectual and put the insight to work quickly and at that time, dunhumby only have 25 person in the company and Tesco agreed to cover the cost and hardware to deliver the analysis (Humby, Hunt and Phillips, 2003).

In addition, Tesco also has problem with data warehouses. According market research in 1996, 46 percent of large companies were attempting to build a data warehouse, with a further 26 percent planning to use one by the end of the year (Humby, Hunt and Phillips, 2003). The data warehouse had plenty of small databases in customer service, human resource and logistics. Tesco obviously need a data warehouse to run Clubcard and by using this system Tesco would be able to get information about their value customers. They can know or the data will show who shopped at what time and customer particular of age, store or location.

On the other hand, Tesco can identify the lifestyle of particular customer by profiling what he or she bought. Data warehousing created problems because there are so many different sources and they are never in a common format. Time is also important because if they take several months to analyse data and get the conclusions it is already out of date. In retail business, time is very important because the old data is not relevant with the current business situation. Build a data warehouse need a huge cost because organize mass volume of data means need to store them in high computing memory and processing power.

Analyst Ovum calculates that they need to spend ? 4 pound to put data for every ? 1 spent building a data warehouse and Ovum also reported that more than two-thirds of data warehouse projects had failed but Tesco proved that Clubcard’s project return on investment. (Humby, Hunt and Phillips, 2003). In addition, the new technology like web can be threat to some operations but Tesco used it to further cement their position. To route success in customer data, Tesco making a warehouse called datamarts (Humby, Hunt and Phillips, 2003).

They created data that can build a miniature data ware house to solve the problems for example if they want only to look the data at one group of customers. They based the solution on the operational online transaction processing (OLTP) which ran the store stills. Using this system, they can get the information as quick as possible while data are getting more information while it is analysed. Tesco had the most popular and most recognized loyalty programme, Clubcard in the UK. The basic principles of how to run a mass-scale, value creating loyalty programme had been tested and proven and are still followed today.

To remain useful, Clubcard data had to be turned into customer knowledge that would create value for the Tesco business beyond the targeting of offers. Communication to the customer via branding and all aspects of store operations is very important to the value customer who is unlikely to have any information of the organization but yet can know and understand what retailer offer is different, new and of value. Data gathered from data warehouses are used to differentiate customer into different categories so that they can provide variety range of product for particular customers.

From the data they also can maintain the stock level s on the shelves because the decision is still in their control. Although Tesco is a leader in the UK grocery, they still face competition from major retailers that want to increase their market share. In future Tesco might face fierce competition to sustain and grow their market share. In order to put Tesco in a strength position, they need to expand their store network in the domestic and international market and must constantly adapt to any fast changing circumstances. Therefore generating revenue may diversify and strength for it’s the global market position.