Tesco's Turbulent Times: A Study on Market Challenges and Strategic Options

The provided assignment content discusses the challenges faced by Tesco, a UK-based supermarket chain, in recent years. The company has struggled with declining market share, increased competition from discount stores like Aldi and Lidl, and declining profitability. The article highlights various strategies that can help Tesco recover its position in the retail industry, including streamlining operations, improving customer experience, and adopting a more flexible approach to pricing and inventory management.

THE STUDY OF THE EFFECT OF
COST LEADERSHIP ON
PROFITABILITY IN THE RETAIL
INDUSTRY:
A CASE STUDY OF TESCO UK

TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION....................................................................................................1
1.1 Background of the study...................................................................................................1
1.2 Rationale of the research..................................................................................................2
1.3 Research aims and objectives...........................................................................................3
1.4 Research questions...........................................................................................................3
1.5 Potential significance of research.....................................................................................3
1.6 Research structure............................................................................................................4
CHAPTER 2: RESEARCH METHODOLOGY.............................................................................5
2.1 Introduction......................................................................................................................5
2.2 Research philosophy.........................................................................................................5
2.3 Research approach............................................................................................................6
2.4 Research design................................................................................................................6
2.5 Research type....................................................................................................................7
2.6 Data collection..................................................................................................................7
2.7 Sampling...........................................................................................................................8
2.8 Data Analysis....................................................................................................................9
2.9 Ethical consideration........................................................................................................9
2.10 Research Limitations......................................................................................................9
2.11 Validity and reliability..................................................................................................10
CHAPTER 3: Literature Review...................................................................................................11
3.1 Introduction....................................................................................................................11
3.2 Concept of cost leadership..............................................................................................11
3.3 Cost leadership models and strategies............................................................................12
3.5 effectiveness of cost leadership on profitability of business..........................................18
3.6 Factors restricting the profitability of business..............................................................19
CHAPTER 4: DATA ANALYSIS................................................................................................21
4.1 Introduction....................................................................................................................21
4.2 Thematic analysis...........................................................................................................21
CHAPTER 5: CONCLUSION AND RECOMMENDATION.....................................................35
Conclusion............................................................................................................................35

Recommendations................................................................................................................36
REFERENCES..............................................................................................................................38

ILLUSTRATION INDEX
Illustration 1: Value chain analysis................................................................................................12
Illustration 2: Porter’s Generic Strategies......................................................................................15
Illustration 3: Bowman's Strategy Clock.......................................................................................17
Illustration 4: Relationship between cost and profitability............................................................18
Illustration 5: Market share of Tesco in UK retail industry...........................................................22
Illustration 6: Value chain analysis of Tesco.................................................................................23
Illustration 7: Porter generic strategy............................................................................................25
Illustration 8: Retail Strategies......................................................................................................27
Illustration 9: Losing market share of Tesco.................................................................................28
Illustration 10: Porter Five force analysis for Tesco.....................................................................29
Illustration 11: Tesco analysis for the year 2014-15.....................................................................30
Illustration 12: Tesco Troubles......................................................................................................31
Illustration 13: Losing market share by retail giants.....................................................................32
Illustration 14: five year timeline of Tesco....................................................................................33

CHAPTER 1: INTRODUCTION
1.1 Background of the study
Globalization has infused high rate of competition within the market by enhancing the
reach of the company and creating high and increased measure of developing the business
operations (Ortega, 2010). The recent market scenario has helped the companies in creating an
effective impact on the overall profitability of the businesses. Every industry has a direct impact
of the current market trends and the businesses are thus developing their businesses to enhance
their market position in order to increase profitability by increasing market sales (Tavitiyaman,
Zhang and Qu, 2012). This has infused intensive price wars between various business units.
Companies presently focus on developing unique pricing measures to attract maximum
consumers while managing high profit margins.
In the current era, there is huge competition in the market place and companies are
adopting varied practices for boosting its effectiveness. Retail industry has faced a significant
impact of this from decades (Ormanidhi and Stringa, 2008). Profitability within the sector is
highly sensitive to the rising rate of competition within the global market. Every retail giant is
currently focusing on developing specific strategies to enhance the sales within the global
market. Companies such as Next plc, Tesco plc, Asda plc, Aldi and Waitrose are few key players
within the sector. The companies are now prioritising their actions to recognize the fundamental
shift in consumer shopping desires and patterns (Hollensen, 2015). Technology, data security,
agile supply chains, price wars and cost cutting are all causing retailers to re-think their business
forecasts and business models.
Cost leadership is one of the leading factors which help the business unit in creating
competitive edge within the market. Strong internal operations help in developing influential
measures for cost cutting. These strategies help in analysing unique brand aspects of the
organizational operations to create high market demand within the industry. Various competitive
strategies have been developed and implemented by business units however cost leadership is
one of most influential measure which helps in reducing the gap between organizational
objectives and business activities. This strategy focuses on providing high quality products at
low cost to enhance effective business operations for the company. It helps the businesses in
developing an edge within the market thus developing a unique and positive brand image for the
consumers. By using various models and tools the companies creates a critical insight about the
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current market position of the company and the future aspects of growth as well (Voola and
O’Cass, 2010).
In this regard, present study is proposed to assess the impact of cost leadership on the
profitability of the company. For this purpose, Tesco has been taken into account which enjoys
dominant market share within the UK retail sector. The company has established an effective
market share within the market (Pertusa‐Ortega and et.al., 2009). It is one of the biggest retail
supermarket chains in the UK. The business unit is globally established and is operating its
business operations in 12 countries across Asia and Europe as well (Ahmed, 2015). In recent
year of the business has faced a downturn. However the consumer preference for the store is still
maintained. Under this research, efforts have been incorporated to assess the strategies that the
company has implemented in order to gain the well-established market position across the globe
(Felsted and Smaith, 2015).
1.2 Rationale of the research
Rationale of the study is developed in order to define the logic or reason behind choosing
the specific topic for the study. Companies presently are focusing significantly to enhance the
profitability in the competitive markets. This demands a significant analysis of given problem
and seeks effective measures to overcome the same. Therefore, the research aims to study the
impact of cost analysis of the Tesco and analyse the management of company's overall
operations. The study will analyse the impact of cost leadership measures on overall profitability
of the company. High rivalry in the economy makes it difficult for the businesses to identify the
most suitable measures to manage the same. The study will focus on analysing the same to
evaluate the impact on overall organizational growth.
Strategy cannot be identified until it is been implemented and reviewed with the outcome.
Thus the research focuses on gaining a clear and effective idea about the prospective issues that
the companies are facing and also the possible outcome for the same within the industry. It is
also evident that there is frequent change in the needs and wants of the customers. Profit margin
of Tesco is also declining in recent time which is another research issue now. Therefore, the
research seeks to assess the actual requirement of customers and develop strategy accordingly.
Also strategies regarding cost, differentiation, product development, marketing and other related,
need to be applied is another prevailing issue. Hence this research focuses on different sort of
strategies i.e. Porter’s generic strategy, Value chain analysis, Porter’s Diamond and other
related models which has been applied by Tesco for the purpose of boosting its profitability.
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1.3 Research aims and objectives
Main aim of this research is to study the effect of cost leadership on profitability in the
retail industry. For conducting this research, Tesco PLC has been considered as it possesses high
market share and effective brand image within UK retail sector.
Objectives:
 To analyse cost leadership strategies used in retail industry
 To analyse factors affecting profitability of business
 To identify the effectiveness of cost leadership to increase overall profitability of
business
 To recommend cost leadership strategies to improve the profitability of business
1.4 Research questions
The research question developed to provide a wide and effective spectrum for the given
study includes:
 What are the cost leadership strategies adopted by Tesco?
 What are the factors that affect the profitability of Tesco?
 What is the effectiveness of cost leadership in increasing the profitability of Tesco?
 What are the recommended strategies which can improve the profitability of Tesco?
1.5 Potential significance of research
Significance of the study focuses on deriving the effective benefits and values from the
given research in order to create an effective impact on the existing researches, literatures and
scholars as well. This helps in developing a high and influential impact on the present study as
well (Askhatova and et.al., 2013). The current research helps in delivering the appropriate and
valid results about the impact of cost leadership on the profitability of companies to gain an edge
within the market. This carries academic as well as practical significance about the given topic.
The study may help in developing creating useful theoretical knowledge for the academic
aspirants and researchers. It has focused on minimizing the significant loopholes in the
theoretical and practical application of theories, models and tools.
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1.6 Research structure
The current research study has developed an effective research structure in order to
develop an effective sequence for the study. This has helped in developing a clear understanding
and achieving the stated results. The structure of the present study is as follows: Chapter 1: Introduction- This chapter provide the clear understanding and background
of the given study. It creates an overall synopsis about various research tools and
techniques employed for developing required results. Chapter 2: Research Methodology- This section of the report creates an effective
understanding about the tools and techniques used to achieve the research objective. Chapter 3: Literature Review-This section of the report provides a detailed analysis of
past studies, researches, tools and models to resolve the research problem. It helps in
developing a clear understanding about the research related terms, terminologies, tools &
models and issues as well. Chapter 4: Data analysis-This section of the report has focused of the findings and
results that helped in analysing the facts and figures of the findings and create a broad
vision and critical analysis of the same.
 Chapter 5: Conclusion and recommendations- This section of the report creates a clear
analysis of the overall report and evaluates the gap analysis for achieving the research
aim. It also provides the effective and practical suggestion to enhance the research topic
for developing most suitable strategies that Tesco may implement to enhance its
profitability.
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CHAPTER 2: RESEARCH METHODOLOGY
2.1 Introduction
Research methodology refers to methods and tools used to collect and analyse the data to
achieve the specific purpose. It essentially considers the concepts and theories which help in
using the underlying methods of developing a critical research study (Cooper and Schindler,
2011). Johnson and Christensen (2008) defined Research methodology as an approach which
considers the overall issues related to the evolution. It significantly revolves around a specific
research problem. The current research study creates a specific and clear impact on the impact of
cost leadership on overall profitability of the company to attain the research aim. This section
helps in developing a significant link between the research problem and methodologies in order
to achieve the specific research results.
2.2 Research philosophy
The research philosophies reflect the research methods that have been used in order to
conduct the present research. It helps the researcher in creating a deep insight about the research
problem thus developing an effective understanding about various factors that may help to
develop the possible solutions (Kimmel, 2009). It crucially consists of the research beliefs and
measures which may help the researcher in resolving the research problem. The three
terminologies that define the same are positivism, interpretivism and realism research
philosophies.
Interpretivism is a complex measure plays a crucial role in developing results from the
collected data (Jackson, 2010). The current study has used the interpretivism approach as the
data has been collected through secondary sources and has been analysed so as to create a clear
understanding of the given concepts. It has also help the researcher in developing a wide
understanding about the theories and models implemented in the research. The researcher has
self-interpreted the results as per the research problem. The competitive strategies used by the
business has been analysed for the study however the self-analysis through qualitative and
quantitative tools helped the researcher in attaining the set results. The positivism research
philosophy implements a well-structured method of to enable generalization of the views. This is
not applied for the study as it helps in evaluating the results on quantifiable measures.
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2.3 Research approach
The next step that follows after selecting the research philosophy is development of the
research approach. The competitive strategies used by the business unit are vast topic to be
studied. The major aim of research approach is to develop specific criteria to attain the research
aims. The two major categorization of research approaches are deductive and inductive approach
(Green, Camilli and Elmore, 2012). Both the approaches are different yet are complementary
parts of the research study. The inductive research focuses on the research aim and revolves
around it for data collection.
The present study aims to study the strategies that can be adopted by Tesco to enhance its
profitability in the UK. Thus the inductive approach has been adopted by the researcher to gain a
clear understanding of the topic. This approach seeks the relevant data as per the research aim to
create a generalized concept for the same. On contrary to this deductive approach deals with the
general concepts and develops specific hypothesis and creates effective understanding for the
research topic (Crowther and Lancaster, 2012). This approach focuses on analysing the general
concepts and validating the same in order to attain the desired results. This approach is not
applicable for the current study as it will not give the valid and desired results to the researcher.
2.4 Research design
Research design refers to various types of research styles that the researcher follows in
order to attain the set objective for the given study. This helps in developing a clear analysis of
investigation type to make the decisions for the study. Various types of research designs develop
a clear evaluation of the research problem (Creswell, 2013). These are exploratory research,
descriptive research, case study, casual research, experimental research etc. every research
adopts a unique research design for attaining the aim of the study. Experimental research is
adopted mainly for scientific research study. The researcher in this research seeks to attain the
desired results by performing a set of experiment on the research population or sample to prove
the derivation. The exploratory research deals with evaluating the new areas of research which
has not been studies or analysed before.
The present study seeks to study the impact of cost leadership on overall profitability of
Tesco plc to enhance its market share within the UK. The research topic helps in developing the
new insights by applying the general theories and concepts. Thus research has been defined as an
exploratory research. This is new and intense research study. Beside this, cause and effect
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relationship is assessed among two variables under casual research (Creswell, 2013). This
focuses on exploring the new theories and designs as well. The descriptive research mainly deals
with the general theories and concepts of the research study which helps the researcher in
creating a clear and effective understanding about the given topic and seeks the application of the
concepts as well.
2.5 Research type
Research type is a wide topic to analyse the results. It is very significant to consider the
same in order to carry out the research successfully. It helps the researcher in developing
effective measures to attempt the research problems to attain the pre-determined objectives. The
data availability plays a crucial role in carrying out the research problem successfully. The
population of data and the selected sample size helps in undertaking the research types
successfully (Singh. 2010). There are two major types of researches that are undertaken in order
to achieve the set objective. These are qualitative and quantitative. Qualitative research
undergoes an in-depth analysis of the research issue and seeks the possible solution by dealing
with multiple perspectives (Tarone, Gass and Cohen, 2013).
The present research attempts to study the impact of cost leadership on overall
profitability of the company. For these research qualitative methods has been used. The major
goal of this research type understands the human and social problem with different perceptions.
It attempts to determine the information from people to analyse the changing social behaviour
and needs. The study has determined the outcome through analysing the consumer behaviour
using past data and reports. The study has used the thematic method to evaluate the desired
results for the given research problem. This helped the researcher in effectively achieving the set
objectives for the research problem. In contrary to this, quantitative research deals with testifying
the theory on the basis of numerical data by implementing the statistical tools and models. This
is not suitable for the current study as it aims at finding out the relevance of the laid hypothesis
through predictive generalization of the theory. This is a relevant method for studying the
research outcomes on the numerical basis which reproduces the universal results.
2.6 Data collection
Data collection is the most significant part of conducting the research study. It helps the
researcher in collecting all the necessary information required to conduct a successful research.
The data is the major source of information for the researcher (Jackson, 2010). The research
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types suggest the researcher with the structure of the study which clearly determines why the
research is being carried out and how it has been preceded. On the basis of this information the
researcher choose the appropriate measure for data collection. These may include the primary or
secondary source of data collection (Kimmel, 2009).
The secondary source of information on the other hand is the past information which is
the part of different studies. This method seeks to find the valid source of information to achieve
the concrete results for the study (Crowther and Lancaster, 2012). The sources of information for
the researcher are newspaper article, past researches, books and journals, research papers,
magazines etc. The present study has used the secondary information has been selected based on
key words and further source has been attained by looking in the reference list. From this,
relevant and reliable information has been attained within the context of subject matter based on
which sound conclusion has been developed. The primary sources of data collection are used to
collect the new information for the population. This is a costly and lengthy process which is
unsuitable for the current need of the research. This method is used in order to gain the various
and different perspectives of different respondents. The different methods used under this type
are surveys, interviews, focus group surveys, observations etc.
2.7 Sampling
Sample is a small part of the population which represents the whole population in terms
of ideologies and characteristics as well. This aspect of the report is significant for the primary
source of data collection. The researchers here seek the population for the study and develop
effective sample size in order to evaluate the appropriate results for the given data. This helps the
researcher in gaining the effective and valid information for the research study. Method of
sampling is used for secondary source of data collection as well (Green, Camilli and Elmore,
2012).
Here the researcher aims at confining the scope of data sources in order to know the
specific and valid sources through which effective and authentic data can be collected. For the
purpose of sampling, non-probabilistic sampling has been engaged in which snow ball sampling
has been applied. Under this, secondary information has been selected based on key words and
further source has been attained by looking in the reference list. From this, relevant and reliable
information has been attained within the context of subject matter based on which sound
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conclusion has been developed. For ensuring the reliability and validity of information, sources
prior to year 2001 has been not be accessed.
2.8 Data Analysis
After the collection of data the information needs to be analysed efficiently in order to get
the required results for the given research. The data analysis demands the effective sources of
data information for the researchers. It uses the crucial means of measures to gain the effective
results to study the given information. Different types of tools and techniques are implemented in
order to acquire the valid result (Johnson and Christensen, 2008). Qualitative research uses tools
such as thematic analysis, trend analysis etc. This helps in creating the effective and authentic
study of the data and helps the researcher in developing a structured way of achieving the
research objectives for the given issue. For the present study data analysis, qualitative methods
have been engaged in which thematic method is determined to apply. This helps in analysing the
various methods of competitive strategies that are used by the business and acquire the effective
results for Tesco plc. While quantitative researches use the statistical method of data analysis
which uses Anova tests, z tests, descriptive statistics, SPSS etc. while
2.9 Ethical consideration
The research study for the dissertation demands a critical measure to develop the
information and validating the same in order to gain the authentic results. The ethical
consideration focuses on gaining the valid and significant information for the research problems.
This helps the researcher in delivering the reliable results without least objection or unwanted
delay. The present research study carried the results on the ethical norms and obligations. The
researcher analysed the facts and findings and for the topic and validated the reliable results for
the same. The information and data of different companies were utilized through authenticated
sources. The researcher did not undertake any actions which surpasses the ethical considerations.
The report used the secondary source of data collections. The information of Tesco plc was not
manipulated or misused to maintain the authenticity of study. The data was preserved efficiently
to maintain confidentiality and reliability. Moreover no work has been copied from other reports.
2.10 Research Limitations
The research study is a challenging task and demands high level of analytical skills to
carry out the effective measures to manage the data information and develop the effective
measures for creating valid results. The research limitations pose challenges in terms of cost,
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time and sources of information. The main limitations to this study are allotted time and cost
which can hamper the research outcome. The topic for the study demands the analysis of
competitive strategy that may help Tesco in developing its profitability in the UK market. The
vastness of the topic demanded high amount of time to analyze the appropriate results. However
the researcher put in the extra efforts to meet the research purpose in the limited time frame.
Also, huge amount of data are available within this context and to choose relevant data is another
limitation to the study.
2.11 Validity and reliability
The application of proper tools and techniques for the purpose of carrying out the
dissertation in an effective way is the crucial demand of the process. This helps in making the
study authentic and highly reliable. The proper usage of data and valid references helps the
researcher in developing the effective measures of developing the research. The present study
used the authentic sources of secondary information. Latest and valid information was used for
generating the required conclusion for the given report. The researcher avoided the unrecognized
sources such as personal blogs and unauthentic online information. In this regard, no influencing
information has been collected with respect to Tesco. The reliable sources for company
information and copy right data have only been used in the report. Also, data has been used for
research purpose only and same will destroy once the purpose of the research gets completed.
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CHAPTER 3: LITERATURE REVIEW
3.1 Introduction
Reviewing the literature is the significant and most crucial part of the present study. This
helps the researcher in developing an in-depth understanding about various factors and past
researches conducted on the topic or similar topics (Tavitiyaman and Zhang, 2011). Secondary
sources of information evaluate the tools and models that has been used and implemented in the
past in order to attain the set objectives. It is the efficient tool for carrying out the current study
which aims at studying the impact of cost leadership on overall profitability of Tesco Plc.
According to Chuang, Yang and Lin (2009) consumers are the major source of income with a
retail sector as they enhance the volume of sales for the company. This in turns helps the
company in increasing the overall profitability for the business.
Clulow (2005) stated that in present times, huge market competition has directly
impacted the business operation of companies. Further, requirement of the customers are
changing very rapidly which is tough to be assessed by the company (Tavitiyaman, Qiu Zhang
and Qu, 2012). Due to this, market share are declining and rivalry is increasing. This results in
the situation of declining in the profitability of company. Recently, Tesco booked a loss of
£6.4bn for the year end on February 2015 (BBC News, 2015). Beside this, Kourdi (2010)
commented that companies have to cope-up with falling sales to remain competent and effective
in the marketplace. Hence, cost leadership is one of the most significant strategies that can be
taken into account by the company for boosting its market share.
3.2 Concept of cost leadership
The concept of cost leadership has been developed and accepted differently by different
business units. Blocher, Chen and Lin, 2008 defined it as a strategy where companies create low
cost of business operation which helps in developing an advantage within the market by
enhancing profit margins and developing competitive measures of handling price wars. Business
units develop effective measures to control direct and indirect cost to minimize the overall cost
of production and enhancing the profitability margin (Porter, 2008).
Ward, (2011) stated that cost leadership requires aggressive construction of efficient-
scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead
control, and cost minimization in areas like service, sales force, advertising etc. According to
Meade, Kumar and White, (2010) developing the cost leadership measures are not easy for the
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business units as this demands high integration of business operations and proper management of
resources and services. Prevailing price wars in the economy seeks most effective measures to
reduce the cost of production in order to gain high market share within the industry. Cost
leaderships help the companies in developing price leadership to fight out fierce market
competition and develop an edge in the market.
3.3 Cost leadership models and strategies
Illustration 1: Value chain analysis
(Source: Li and Li, 2008)
Value Chain analysis
Value chain analysis of the company represents evaluation of overall business activities
by efficiently integrating the overall operations of companies. It focuses on both primary and
supportive business activities in order to develop an effective understanding of cost controlling
measures for an organization (Amoako-Gyampah and Acquaah, 2008). This strategy helps
companies in deeply evaluating every segment to determine the cost of operations and
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integration of business. This helps the companies in analyzing internal business strength which
may help it making cost leaders to fight out fierce market competition.
The value chain analysis for Tesco reflects the overall internal business strength of the
company.
Primary activities1. Inbound logistics: This represents the effectiveness of internal inventory system of the
company which helps in analyzing the efficiency of receiving, storing and distributing the
raw materials used in the production process. Tesco has developed closed proximity with
its suppliers which help in managing the cost of raw materials which direct cost for
business. Lean and agile inbound logistic function has helped the company in managing
the cost.2. Operations: This defines the process of transforming raw material into finished products.
Efficient use of technology and proper management of operations through timely
purchases of assets, minimizing manufacturing costs and developing measures for
organizational learning helps the company in managing cost. The effective supply chain
of Tesco by effective use of IT system has facilitated low cost measures (Graham and
Shaw, 2008).3. Outbound logistics: This comprises of the final distribution system of the company which
enhances final product availability. Physical stores and online websites has developed
effective measures for maximizing the sales of the company.4. Marketing and sales: Highly trained workforce and effective investment in promotional
measures which leads to maximum sales measures helps in managing the cost of the
company. Aggressive promotional measures and high quality goods has helped Tesco in
managing cost of promotion while generating high sales.5. Services: highly customized services and developing effective measures of
communication helps the companies in creating competitive edge. Cost leadership and
differentiation strategy helps Tesco in developing price leadership while managing wide
variety of products which helps in enhancing sales and profitability of business.
Supportive activities
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11 Procurement: Low cost of products and cost cutting measures helps companies in
managing low cost. Tesco has managed low cost of procurement of raw material to
manage internal cost.11 Technological development: The implementation of high and advanced technology helps
in minimizing the cost of production. Tesco has well developed measures of close market
proximity and supplier relation to cut cost raising measures.11 Human resource management: Employees helps in attaining organizational objectives.
Tesco has employed skilled and talented workforce which helps te company in attaining
high market sales by measures such as sales promotion (Meade, Kumar and White,
2010).11 Firm infrastructure: Cost effective management information system, simplified planning
measures and few management layer helps companies in reducing overhead costs. Tesco
has managed well defines infrastructures to manage effective market operations and
develop organizational operations.
Porter Generic Strategy
Michael Porter (1980) suggested the generic strategies that may help the companies in
developing competitive advantages within the market. As per this model, company can boost its
competency and profitability by incorporating any of the options from cost leadership (offering
products at lowest possible cost), differentiation (delivering unique and differentiated products)
and focus (targeting small segment of customers). This model can be applied by any business
unit at any level of business operation.
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Illustration 2: Porter’s Generic Strategies
Cost leadership: The business unit creates an effective market position either by selling the
products at an average industry price which results in increasing the profit of the company or
selling it below the average industry price which enhances the market share for the business unit.
The suggested strategy focuses on developing the measures to enhance the cost leadership by
improving process efficiency, developing access to large raw material at lower price, optimum
utilization of resources, outsources to save labor cost etc. (Weerawardena and Mort, 2008). This
may help the company in gaining the cost leadership for the larger target market hence creating a
winning edge (Hu, Houde and Duong, 2008).. Cost Leadership tends to be more competitors
oriented rather than customer oriented. Tesco has developed effective measures to enhance cost
leadership within the market by developing strong internal environment and developing
benchmarks for the competitive firms within the market. The company enjoyed price leadership
for a long period of times however recent researches reflects that the emerging German
companies such as Aldi and Lidl is has gained price leadership thus grabbing wide market share.
Differentiation: This strategy focuses on developing the product or service such that it has the
unique and differential attribute to offer within the market. Such products have the capacity to
generate higher demand within the market as are valued more by the consumers. The value
added by the company may allow them to charge premium price for it thus covering the extra
cost incurred.
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Focus: The focus strategy focuses on narrowing down the segment for achieving the cost
advantage or differentiation within the market. This focuses on offering better and enhanced
services to the consumers thus to gain higher rate of customer loyalty (Rosenfeld, 2012). This
enhances the volume of sales thus increasing the overall profitability of the business.
Bowman's Strategy Clock: Cliff Bowman and David Faulkner developed Bowman's Strategy
Clock in the year 1996. This model extends the generic strategies suggested by Porter form three
to eight. It extends Porter generic strategies from three to eight. It explains the cost and perceived
value combinations many firms uses to identify the likely hood of success criteria. This model
state that, competitive advantage can be attained with the help of different strategic moves
(Spillan, Parnell and Singh, 2008). These are low added value, low price, hybrid, differentiation,
focused differentiation, high margins and monopoly pricing and standard price.
Position 1: The low cost low value strategy focuses on developing the cost effectively within the
market in order to sustain the market position for long term.
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Position 2: Low price position is the cost leadership arena where the price wars is high thus to
maintain the margin and make profits organization focuses on the volume of sales within the
market.
Position 3: Hybrid position offer low cost but considerable value to the consumers. The
companies here build effective reputation by fair prices for the goods and services. The cost and
quality are the assurance for the consumers.
Position 4: At differentiation position companies offer its consumers high perceived value for
the goods and services. Premium pricing helps the companies in developing the brand value and
image for its consumers.
Position 5: Focused differentiation position offers high value goods for the niche market. This
helps the companies in covering the overall cost thus making considerable profits within the
market.
Position 6: Increased price position is the one where companies simply increase the product
price without actually enhancing the value of the product. This is a short term strategy that the
companies use in order to adjust the value for the products.
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Illustration 3: Bowman's Strategy Clock
(Source: Simister, 2011)

Position 7: High price Low value can be well explained as a monopoly positioning. The
companies use this to enhance the market position.
Position 8: Low value standard price is the position for the highly competitive products which
demands the standards pricing to maintain the market share e.g. food grains, bread, milk etc.
3.5 effectiveness of cost leadership on profitability of business
Illustration 4: Relationship between cost and profitability
(Source: Voola and O'Cass, 2010)
Epstein and Buhovac, (2014) describes cost leadership as a most aspired method to
enhance organizational profit by developing high profit margin for the companies. Various
authors and researches have developed an effective understanding about the model and its impact
on the overall growth of the organization. According to Li and Li, 2008 a firm pursuing a cost-
leadership strategy attempts to gain a competitive advantage primarily by reducing its economic
costs below its competitors. This leads them to enhance volume of sales thus increasing the
revenue of the company which helps in enhancing profitability of the company.
Profit= Revenue – Cost
Retail industry enhances the profitability of business by enhancing the sales of the
company as managing cost by developing highly integrated measures of working within the
industry. Fierce market competition and changing demand of consumers leads to enhance the
performance of the company by attracting maximum consumers for the products offered.
According to Porter, 2008 price leadership refers to a situation where prices and price changes
18

established by a dominant firm, or a firm are accepted by others as the leader, and which other
firms in the industry adopt and follow. Retail industry strives to attain this situation in order to
gain effective market share and develop high revenue by attracting maximum consumers.
Blocher, Chen and Lin, 2008 explains that cost leadership is a valuable factor for retail industry
as buyers do not differentiate within the products much. High price sensitivity makes a firm
attractive by delivering quality products at comparatively low cost thus this enhances overall
sales of the company which leads to high profitability.
According to Porter, 2008 companies develop measures of cost leadership to gain a
competitive edge within the market. Selling products at low profit margin leads to shrink overall
profitability of the company however selling this enhances volume of sales which enhances
overall profitability. However Felsted and Smaith 2015 developed a financial understanding by
stating that high volume sales covers fixed cost efficiently which helps in increasing profitability
after breakeven point. Cost leadership helps in providing price leadership for the companies
which in-turn develop a competitive edge within the market. This strategy provides a clear
solution for the perfect competitive markets.
Tesco has been successfully using cost leadership strategy by offering low prices
consumer goods to attract maximum consumers This helps the company in offering products at
low rate than the competitors consistently. This helps in enhancing organizational sales on large
sales. Moreover strong supply chain of the company helps in controlling the overall cost of the
firm thus creating an effective impact on the overall growth (Butler, 2015). However according
to company's financial statements and reports new market entrants such as Aldi and Lidl has
adopted price leadership model which has created helped those firms in grabbing wide sales.
Retail consumers are not loyal to the company because companies offer similar products at
different prices. Hence cost leadership is the key factors that help the company in attaining high
market sales thus enhancing profitability of the firm.
3.6 Factors restricting the profitability of business
Profitability is core objectives of all commercial organizations operating within the
economy. Organizations focus on creating effective impact on the growth of the business by
analyzing the factors prevailing in the economy. According to Ortega, 2010 price leadership is
one of the major factors that enhances sales and profitability of the company however there are
many other factors that have a direct impact on internal profit measures. Focusing on the cost
19

factors companies often lose sight form other organizational activities and potential threats
within an economy. Changing tastes and preferences are not incorporated which leads to
declining organizational sales. Moreover Kourdi, 2010 mentions that promotion and marketing
are the soul of organization's sales , however to maintain the cost leadership organization's often
cut these cost which results in disastrous results in highly sensitive markets. To manage the cost
of he companies often quality is compromised which have a direct impact on the organizational
brand image (What Determines a Company's Profitability? 2014).
Recent news reports revealed that Tesco, low cost market leader has suffered a loss of
£6.4billon last spring. The company has lost its sales widely due to many collective factors
which has collaboratively declines the growth of the company. New market entrant Aldi and Lidl
has grabbed high market share in the UK economy as the company has adopted efficient
business model. Tesco's cost cutting policies and ineffective internal management policies has
resulted in deteriorating its profits widely thus creating wide impact on overall growth and
market position (Why Tesco can't compete with Aldi and Lidl. 201). Hence it is evident that Hard
discounter and price leader Tesco is facing huge hardships as the organization limited its vision
towards cost leadership ignoring factors such as differentiation and focus. This has resulted
efficient downfall for the organization.
20

CHAPTER 4: DATA ANALYSIS
4.1 Introduction
Data analysis is a very crucial segment of a research study. It tracks down the actual
information regarding issues and topics that the researcher is seeking for. Using primary and
secondary sources of data the information is collected form people and by referring past data of
the companies. This helps in providing valid and authentic data which helps researcher in
analyzing the information to make corrective interpretation. Present topic of the research is to
study the effect of cost leadership on profitability of Tesco plc. As per the research methodology
the study will be conducted on the basis of secondary data which will help the researcher in
evaluating the corrective interpretation. Themes have been developed for the study in accordance
with the pattern of data gained through secondary research. This will help the researcher in
gaining the valid results for the study.
4.2 Thematic analysis
Theme 1:Tesco has gained highest market share in the retail industry of UK
21

Findings: The above figure clearly reflects that tesco holds a dominating position in the retail
industry of UK. It established its business operations in the year 1919 and has been successfully
operating its business operations thereon. Tesco occupies a unique place in British retail,
attracting millions of visitors on the daily basis. It has been the biggest retailer of UK by sales
and is the second largest retail chin on the world. The organization has employees more that
30000 employees and is operating about 3150 stores across the globe. The company
continuously expands its business operations to deliver quality products at minimum prices
(Tesco reveals biggest loss in UK retail history. 2015).
On the basis of industrial analysis of 2014 it can be clearly depicted the Tesco has gained
highest market share of 28.8% in UK. The nearest competitor of the company Asda has gained
17.3% of market share in The UK market. Sainsbury is next in the line which covers 16.1% of
the market share. Morrison has gained 11% of the market share of UK market. These
organizations pose a close competition to the organization yet carries wide gap in terms of
22
Illustration 5: Market share of Tesco in UK retail industry

market share. There are many small companies which are the major market players and pose
considerable market competition. Companies such as Waitrose, Aldia and Lidl covers a small
segment of market share in the retail industry. On the basis of above analysis it is evident that
Tesco has developed a dominant market position which is very significant for the retail industry
because this sector is vast and volatile. Thus small figure represents a large value (Dryburgh,
2014). Hence it can be clearly seen that Tesco holds highest position in the retail sector which
reflects high source of profitability of the company.
Theme 2:Tesco has developed strong value chain to enhance cost leadership
Findings:The value chain model is one of the crucial tool to determine the internal business
environment of the business while developing effective market planning measures to enhance
quality offered while managing the cost of production. Company reports and analysis reflected
that Tesco has developed a strong value chain within the market which has helped it in
enhancing the cost saving measures. Effective integration of business activities and proper
23
Illustration 6: Value chain analysis of Tesco
(Source: Dryburgh, 201)

allocation of resources has helped the business in enhancing profit market and gaining cost
leadership in the competitive era.
Tesco has developed strong supplier relations which has helped the company in
developing lead and agile logistic functions. This has helped the unit in saving ample of time,
cost and resources. The operations of the company accommodates fast and effective achievement
of organizational objectives. Strong supply chain and advance technology within the system has
resulted in saving cost of operations for business by enhancing distribution system. Just in time
inventory measures is yet another system which has helped the company in saving high cost of
storage and product wastage. Outbound logistic system of the company has been managed on the
basis of physical stores and online portals as well. This system has helped in enhancing the sales
by making the maximum availability of products. High revenue covers major cost and enhanced
business profitability (Tesco reveals biggest loss in UK retail history, 2015). Moreover Tesco
keenly observes the market trends and invest in the marketing and promotional measures to gain
maximum sales by attracting large number of buyers through most attractive discounts and
themes which helps in attracting maximum consumers for the company. Lastly the services
offered by the company in form of offering quality products at lowest price in the market helps
the consumers in choosing Tesco over other retail units. The above cost analysis of Tesco
helped the company in saving huge cost by establishing effective market position. This helped
the company to create high measures of price leadership and enhancing its profit margin. On the
basis of value chain analysis of the company it is clearly seen that Tesco has developed strong
internal system to create most effective measures of cost cutting to gain cost leadership.
Theme 3: Price leadership and product differentiation helped Tesco in building a competitive
edge
24

Findings: The analysis of overall study it is evident that Tesco has attained a leading market
position. The strategic management analysis of the company depict that Tesco had adopted
porter generic strategy which helped the company in gaining a competitive edge within the
market. The industry focused on managing the cost of sales and developed an effective measure
of offering low price products and services which helped the company in attaining an edge
within existing competitive market.
The value chain analysis of the company clearly determined that integrated set of actions
to deliver, store and sell goods helped the company in delivering products and services at
comparatively low market price. The cost leadership ensure helped the company in strengthening
the cost control measure for the company while developing efficiency of business operations. On
the basis of researches its is evident that Tesco adopted cost leadership as on of the major
strategy to again wide sales and effective market share within the economy. However the
company has also managed the product quality to enhance provide differential products and
services to the employees (Tesco: How one supermarket came to dominate, 201). This helped
25
Illustration 7: Porter generic strategy
(Source: Cooper and Schindler, 2011)

Tesco in gaining unique consumer perception and low cost position within the market. Moreover
it is also determined that strong internal business operations helped the company in creating
value for consumers by providing superior quality, innovative products, brand image, and good
services. All the mentioned factors helped in developing a competitive image for the
organization. Strong focus on supply chain created a benchmark within the market for the
company which led Tesco to create a profit record for the year 2011-12.
Theme 4: Cost leadership is no longer a measure of high profitability for Tesco
26

Findings: Tesco has managed high market share within the economy by offering considerable
products and services at reasonable prices within the market. This policy of the company is quite
stagnant and non innovative. The records and data of the company clearly represents that Tesco
has been blinded by the cost cutting measures such that it has lost its major focus from
developing and offering innovative products and services (TESCO’S SQUEEZED MIDDLE.
2015). This has brought a usual competent for the organization. The cost and quality balance has
27
Illustration 8: Retail Strategies
(Source: TESCO’S SQUEEZED MIDDLE. 2015)

stucked the company in the middle of the matrix which represents that the company is constantly
managing its system in order to carry out the routine functions.
The above figure clearly represents that these policies of the company has adversely
impacted the market share of the company. As per the figure major retail giants such as Tesco
and Morrison has subsequently lost their share in this due course of time due to core focus on
cost minimization thus delivering price leadership. However companies such as Asda, lidl, aldi
etc has enhanced their market share as the companies are offering more that mere price
leadership to the companies (Tesco reveals biggest loss in UK retail history. 2015). On the basis
of reports and researches it has been analyzed that cost cutting strategies for Tesco has come to
28
Illustration 9: Losing market share of Tesco
(Source: Discount stores feast on Tesco’s market share. 2014)

the saturation point and that the consumers now demand effective measures of integrating
services and developing innovative measures to create unique demand in this competition.
Theme 5: Tesco is losing competitive position within the market
Findings: on the basis of overall research and data analysis it can be clearly seen that Tesco is
losing the competitive edge within the market. The losing market share and new market entrants
within the economy has acquired a leading market position in retail segment. Application of
porter five force model helps in determining the actual position of the company. The above
analysis explains that Tesco has low late of threat from the new market entrants as the the
company has raised the standard of competition which may be difficult to matched with.
29
Illustration 10: Porter Five force analysis for Tesco

Moreover the bargaining power of suppliers is weak either as the products and material required
by Tesco are not unique or exclusive. Those are quite easily available within the market which
has resulted in reducing the bargaining power of the suppliers as well. Moreover lack of perfect
substitutes provides advantage to Tesco as no company offers similar products at similar price
range. However the bargaining power of consumers is enhancing increasingly within the market
retail consumers are not loyal to the company but seek for products with best offers and cost
(Discount stores feast on Tesco’s market share, 2014). German companies such as Lidl and Aldi
has gain wide focus on this segment by developing attractive promotional measures with unique
offers and discounts. This has adversely impacted the growth rate of the company and posed
subsequent competition for the company. Organizations need to balance between the cost
leadership and services offered within the segments in order to develop a competitive edge
within the market. Fierce industry rivalry has worsened the competition for Tesco in the retail
segment.
Theme 6: Tesco suffered a loss of ₤6.4 billion for the year 2014-15
Findings: Recent reports of the companies clearly depicts that the company has faced major loss
of ₤ 6.4 billion for the year 2014-15. increasing market competition and declining market share
of the company has resulted in delivering heavy losses for the organization within the economy.
This loss has been the largest loss in the history of retail market which has shocked the economy
30
Illustration 11: Tesco analysis for the year 2014-15
(Source:Tesco just posted a horrific £6.3 billion loss for 2014 / 2015. 2015)

significantly. Various business activities and operations has led to the combine action on the
organizational profit.
The company and industry data analysis labeled the current loss of the company as the
heaviest loss of UK retail business. The management has analysts has found various issues which
lead to heavy losses within the company. Losing track form competitive strategies and
ineffective utilization of space were counted as the major factors which enhanced the cost. In
effective market promotion to save the cost of the company was also determined as one of the
leading factor which resulted in overall loss in sale. Moreover heavy price wars within the
market posed major competition to the company by delivering low priced consumers goods
which helped in attracting major consumers towards those retail units (Tesco posts record £6.4bn
annual loss, 2015). Hence overall study of the report clearly determined that the company has
lost the major market due to lack of integrated business practices and ineffective market analysis.
Theme 7: New market entrants like Aldi and Lidl are offering more than price leadership
31
Illustration 12: Tesco Troubles
(Source: Tesco posts record £6.4bn annual loss. 2015)

Findings:
The above given figure showcase the market share of different famous UK retail firms. In
this context, from the above figure it can be said that Aldi and Lidi are being counted under the
category of such organizations that has achieved major improvement in their market share within
the tenure of one year. In order to achieve the same, price leadership has played very crucial role.
Here, both firms relies upon the objective of increasing the profits of company by providing high
quality services to customers at cost effective prices. Besides price leadership tactic, Aldi and
Lidi have also taken assistance from other factors which have played crucial role in their growth
in German market.
It consists of giving attractive and influential offers along with adopting unique and
aggressive promotional tactics. Both the given firms uses modern promotional media such as
social networking site with an aim to reach among large number of customers. In addition to this,
with the help of given mean firm is reaching upon global buyers. It is by complying with the
given type of activity only, both enterprise have achieved major success within a limited time
period. In addition to this, Aldi is taking green initiative for the purpose to develop its unique
32
Illustration 13: Losing market share by retail giants
(Source: The UK’s biggest supermarkets are shedding sales, staff, and stores. 2015)

image in market (If Tesco’s boss can trim the fat, 2015 could see the retailer rise again, 2015).
Furthermore, the given type of practices are playing very crucial role in terms of giving
competitive advantages to the company. In addition to this, it has also being assessed that both
retail giants makes effective allocation of their resources. These all given facts proves that Aldi
and Lidi are offering more than price leadership.
Theme 8:Multiple factors contributed Tesco in losing its competitive position
Findings:
The above figure depict about five year time line of Tesco. From the given figure, it can
be interpreted that Tesco has achieved record profit of £3.8 bn in the year 2011. Thus, this whole
tenure can be consider as period of growth for Tesco. However, in the year 2012 firm has
incurred 1% fall in profit. In the past 20 years, it was the first time that Tesco has incurred such a
major fall. This condition has not stopped and profits have fallen in consecutive three years such
33
Illustration 14: five year timeline of Tesco
(Source:6 big mistakes that led to Tesco's colossal £6.4bn loss. 2015)

as 2013, 2014 and 2015. It is in the given tenure only in which Tesco has lost its competitive
position in market.
In accordance with the given context, there are some factors assessed which have played
very critical role in terms of decreasing the profit as well as competitive position of cited firm.
One of the factor is diversion of Tesco concentration from food ranges to other areas such as
banking, home services and second hand cars. Tesco has the specialization in selling huge
variety of foods. However, from the time when it has taken decision about the diversification,
whole scenario for the firm has changed. Here, it is because of the presence of given factor only
firm has started loosing its market share in UK market (The UK’s biggest supermarkets are
shedding sales, staff, and stores, 2015). In addition to this, Tesco lack of efforts towards
extension of their floor space is regarded as another factor which has contributed towards Tesco
in loosing its competitive position in market.
34

CHAPTER 5: CONCLUSION AND RECOMMENDATION
Conclusion
On the basis of above findings and analysis it can be concluded that cost leadership
contributes efficiently in gaining high profitability within the market for retail business segment.
However these factors may blind the business units from some crucial analysis which may lead
to heavy losses and diminish the competitive edge of the company. Analyzing the case of Tesco
plc it can clearly visible that the company gained high market share within UK market however
the core focus of the organization on cost leadership led to unreasonable impact on the overall
competitive position. On the basis of secondary research analysis ample of information helps in
determining the impact of various factors which has a direct impact on the growth of the
company.
Objective 1:To analyse cost leadership strategies used in retail industry
The present study helped in determining the activities that the retail segment undertake to
developing high command on cost strategies within the market. These strategies widely help
businesses in growing its business operations and gain a competitive edge within the market.
Tesco adopted similar measures in order to create a competitive edge in the nation. Cost
leadership strategies by enhancing the supply chain and value chain of the business helped Tesco
in gaining efficient power over cost control measures which resulted in developing high market
growth for a specific time period. However it was analysed that these strategies were not
exclusive or non replicable to sustain the growth. Thus other retail segment copied the strategies
and delivered high value to consumers declining the growth prospects.
Objective 2: To analyse factors affecting profitability of business
The analysis of business case helped in analysing wide prospects of business profitability
within the market. Analysing the business operations of Tesco helped the company in creating a
in-depth analysis of the measures of growth and profitability. The business case analysis helped
the company in creating an effective image of the business operations. The recent shock of heavy
losses in the company reflected that Tesco has lost the track of external business environment
which resulted in declining market share. Continuous slump in market sales resulted in the
overall losses in the overall profit. Hence it is clear that though Tesco analysis that declining
sales of the company was resulted due to lack of considering consumer needs and demands.
35

Objective 3: To identify the effectiveness of cost leadership to increase overall profitability
of business
The study helped in analysing that cost leadership is one of the most crucial segment in
developing an effective market position within the economy. This helped the company in
gaining high competitive edge the industry offers products and services to the consumers which
are of different brand. Thus price leadership helps in attaining high market sales which generate
maximum revenue for the company thus enhancing the profitability of business. Tesco created
high impact on the profitability till 2012 however later the company did not carry out proper
measures of gaining price leadership which reducing consequential profits on yearly basis which
finally led to huge recorded loss for the business and industry as well. Various factors such as
losing control over management, human resource disputes, problem of transparency, ineffective
utilization of space, lack of innovation and ineffective competitive strategies resulted in the
declining profits of the company.
Objective 4: To recommend cost leadership strategies to improve the profitability of
business
It has been explored from the report that there is existence of several ways that can act as
an aid in the bringing development of the current market position of Tesco to develop its market
growth and development within the economy. The company must efficiently develop a
competitive position within the market and implement the turnover strategy for the major loss
recurring segments and stores to minimize losses. Moreover the well established brand image
and market share must be best utilised to win back consumer trust for the unit. In addition to this
hybrid strategy of business growth and competitive advantage will helps the company in re-
establishing the brand value of the company in the competitive market. To gain cost
effectiveness the company must implement concentrated measures of pricing measures. The lack
of market focus may lead into losing the sight from increasing market variations thus losing
market leadership.
Recommendations
On the basis of current study several recommendations can be provided to Tesco in order
to overcome current market situation. This may helped the company in regaining the lost market
position and enhancing the sales to cover up market loss that the units has been facing from long
36

training years. It has been seen that the company has recently suffered major internal conflicts
which resulted heavily on the overall performance of the employees. This resulted in high
employee turnover and low productivity ad sales. Thus Tesco must current strengthen the
internal business operations to enhance its capability to fight out fierce market competition.
The major issue been faced within the company is that the losses of the company has
resulted heavy financial impact which inturn has restricted its growth prospects. In order to
overcome these losses the company must analyze the under-performing stores and close them in
order to reduce heavy losses within the market. This will help the company in saving ₤40m cost
of operations (If Tesco’s boss can trim the fat, 2015 could see the retailer rise again. 2015). The
company must also evaluate the slow selling and loss recurring product range and disinvestment
in the same for creating financial stability within the company. Moreover keeping track of
changing needs and preferences of consumers will also helps the company in delivering highly
competitive products and services to the buyers. Tesco can also focus more on technological
aspects for the purpose of offering service and products to customers. This is the scenario
because customers are familiarized with technology and it eventually helps company in making
sound and real time communication with customers.
Building consumers relations and enhancing services will help the company in gaining
back the trust and loyalty that the company has gained in these year of market operations.
Consumer relations will renew the trust and loyalty for the store products ad services. Moreover
competitive consumer services is yet another measure which may helped the company in gaining
effective market popularity. This will lead the company in delivering high sales and growth for
gaining high market share. Lastly the better utilization of space and big retail outlet may result in
saving the cost and enhancing revenue earning measures which in-turn may increase profitability
of the business.
37

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