Analysis of Tesco's Cost Leadership Strategy and Market Position

This case study analyzes Tesco's cost leadership strategy and its market position in the retail industry. It examines the factors contributing to Tesco's competitive advantage and evaluates its strategy of opening a discount chain. It also discusses the potential of Aldi and Lidl's venture into e-commerce. The study highlights the importance of people, organization, and technology in the retail sector.

Assessment 2: case
study 1
1

Table of Contents
1. Introduction to case study........................................................................................................3
2. Problems in case study. What are people, organisation and technology factors in it..............4
3. Analysis of cost leadership strategy of Tesco based on porter competitive force model........5
6. Comment on Tesco strategy of opening a discount chain and would it be able to retained its
market position in near future?....................................................................................................6
5 Is ALDI and LIDI strategy of venture into e – commerce is good idea?.................................7
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10
2

1. Introduction to case study
In the caste study it has been described about big four retail firms of UK. Also, it is stated
how tesco gain competitive advantage in market with adopting of cost leadership strategy. But
with rivals Aldi and Lidl heavy discounts it is found that tesco is not able to generate enough
profits. In addition to that, there is change on consumer behaviour due to recession. The people
are buying goods from supermarket. Due to that, there is decrease in Tesco market share and on
other hand aldi and lidl profits raised. Moreover, it is summarised that tesco CEO Charles
Wilson has taken decision to close website of firm. Now they are focusing on investing in other
platform and offering better and high quality services to customers. there was also cut of 500
jobs in firm and they faced various challenges in generating profits (Horgan, 2016)
Besides that, it is concluded from case study that tesco attempt to compete with Amazon
and argos has failed due to its low profits. In addition, discounted super market is also a reason
behind it as Aldi has opened 700 stores at global level. It highly attracted a lot of customers as
products were offered at low prices as compared to tesco. This resulted in shift in their buying
decisions and preference. Now, they focused on buying from discounted super market. There has
high contribution of Aldi and lidl in GDP of UK with £8.5 billion.
But main reason found was inflation in wages. The services offered by aldi are at low
prices. It led to gaining of customer satisfaction. These both companies have transformed UK
retail market. They are giving tough competition to other big firms. Besides that, Lidl started its
digital logistics. It was first step of innovation. Here, they introduced chat bot which was helpful
for customer to choose products. However, to compete with firm tesco decided to open 60
discounted stored in UK. But data shows that this strategy has failed. The competition between
tesco and aldi and lidl is stiff (Kirby, 2016). There are many people who prefer to buy goods
online and on daily basis. So, tesco is operating online since long time as in 1996 they launched
their first online store. It has benefited in attracting more customers outside UK. Virtual stores
were opened in South Korea where barcode system was used to purchase products.
It has been summarised that grocery industry needs to adapt to consumer demands and
lifestyles continuously. The UK and South Korea are examples of it. While people in the UK
switched from domestic big supermarkets to budget supermarkets, it was opposite in South
Korea that turned Tesco into the country’s second largest grocery retailer. Customers in the UK
are price sensitive due to economic recession and inflation, but in South Korea they have
3

embraced the technology to suit their time sensitive lifestyle. Moreover, discount supermarkets’
concept of entering the online shopping market has similar risks and problems that other
supermarkets face (Kirby-Hawkins, 2016). Thus, uniqueness of these supermarkets lies in their
simplicity and low cost, which they might be putting at risk when they start to sell food groceries
online. They need to emphasize on other area rather than on cost model.
2. Problems in case study. What are people, organisation and technology factors in it
It has been evaluated that there are any problems in case study. It is found that opening of
discounted stores led to shift in customer preference. So, this led to shift in UK retail market.
Here, main reason was inflation in wages due to which people needs changed. They prefer to buy
products at low price. Here, another problem is failure of tesco in UK and with large firm that is
Amazon, argos. This also became reason due to which firm was not successful in UK. One more
problem identified from case study is not using technology to attract people. tesco did not
emphasis on technology to increase customer satisfaction. It led to change in shift of their
preference towards lidl that use technology in it (Waddington, and et.al., 2018).
It is found that due to aldi and lidl super market stores it create problem of shift in
consumer preference. Also, adopting of cost leadership by retail firms also contributed in change
in customer preference. Another problem that is stated is failure of tesco with large firm that is
Amazon, argos. It is because of low profits gained. They were not able to cover operating cost.
Another problem that is mentioned in it is failure is domestic market of Tesco. They only
focused on offline stores.
Furthermore, it is found that technology adopted by retail firm of online shopping resulted
in cut of jobs. Due to that tesco lay off 500 people. The factor that contributed to problem of
failure of tesco in UK is people. They are price sensitive due to which they prefer to buy at low
cost. Other than this, due to recession as well people started cutting cost in buying grocery.
Another factor which contribute is technology. Tesco did not focus on online stores in UK. The
company got huge success in South Korea by opening of virtual stores. Thus, this highly
impacted on life style of people in positive way. As lidl started digital logistics and chat bots that
helped people to choose products. Hence, tesco focused on offline stores only. Also, Tesco did
not focus on needs of people. Thus, they did not follow low price strategy. On contrary aldi and
lidl opened large number of discounted stores that met need of people.
4

Hence, it is stated that people, organisation and technology played vital role in problems
which occurred in retail sector in UK (Zissis, Aktas, and Bourlakis 2017). It also led to rise in
competition in industry. Due to it, tesco market share declined and it provided opportunity to aldi
and lidl to capture it.
3. Analysis of cost leadership strategy of Tesco based on porter competitive force model
Porter competitive force is an effective tool that helps in understanding factors that
contributed in shape of particular industry like existing competitive rivalry, power of buyers and
suppliers, threat of substitute products and threat of new entrances. So, porter competitive force
is used to understand the way Tesco have gained competitive advantages by using cost
leadership strategy in retail sector of UK. Such as:
Existing rivalry: It can be stated that there are huge number of competitors or organisation
operating in retail sector of United Kingdom like Morrisons, Sainsbury, ASDA and Aldi. Among
them all Tesco have large market share around 31.1% in 2007 as it have focused on cost
leadership strategy in order to gain competitive advantages. Company by brining economic of
scale or maximum utilisation of resources have offered maximum value to customers at
minimum prices that resulted in growth and expansion of firm (Porter’s five forces analysis of
Tesco, 2019). So, despite of high competitive rivalry Tesco is able to enhance its market share
and sales volume.
Power of consumers: People have more power than companies as they are individuals that make
purchase of products and services in order to satisfy their respective needs thus lead in
generating revenue. At the same time there is low switching cost thus customers can easily
choose one company to another to fulfil their respective needs. Therefore, Tesco by making use
of low cost leadership strategy have influence and motivated customers to prefer its products and
services rather than other competitors in market.
Power of Suppliers: There are numerous supplier of qualitative raw material at reasonable rates
in retail industry such as 2500 and many more across worldwide. So, suppliers have significant
low prices as compared to Tesco therefore company can easily negotiate with them in order to
get products at low price. Strong brand image and relationship with suppliers have contributed
company to bargain and get material at minimum cost for effective satisfaction of customer’s
requirements (Rajkumar, 2016). Therefore, it can be stated that power of suppliers are less so
Tesco is able to get material at low cost and deliver maximum value to end customers.
5

Threat of new entrance: Tesco through making use of low cost strategy is not much worried
from threat of new entrance as it have already positioned its brand image, reputation in mind and
hearts of customers. At the same time, new companies have to invest lot of capital in order to
establish and expand their business operation in retail sector. Thus, it can be stated that Tesco
through its core competencies i.e, low cost strategy have created barriers for new entrances and
expand its business.
Threat of substitute products: It can be illustrated from the above case study that threat of
substitute products is medium when Tesco have make use of cost leadership strategy. As there
are many small organisation that have tried to imitate non food items in order to attract
maximum customers and huge profit margin (Parker and et.al., 2017). Tesco in order to cope up
with threat of substitute products have planned to open express stores at low town and cities so
that people can easily come and buy products as per their requirements.
Therefore, it can be stated that Tesco by making use of cost leadership strategy have gain
maximum market share and competitive advantages in retail industry of United Kingdom.
6. Comment on Tesco strategy of opening a discount chain and would it be able to
retained its market position in near future?
Tesco in order to defeat two main competitors named as Aldi and Lidi have planned to
start its operation in discount market so that more and more customers are motivated to be part of
it rather than other competitors. Chief executive of Tesco, Dave Lewis has planned new format
of jack that is established with an aim to compete German discount like Lidi and ALDI by
making use of existing brand image with low cost strategy as compared to all competitors in
retail sector. Company have started its new discount chained named as jack that promise its
customers to offer “cheapest products in town”. The new stores jack will continuous check price
provided by other competitors or local rivalry so that it can set the cheapest price as possible for
satisfaction of customer’s requirements (Bronnenberg, Klein and Xu, 2018). Tesco have planned
to sell across 2600 products in jack stores as compared to Aldi that offer 1800 product only in
order to satisfied needs of end users. It was founded from one of the magazines of retail
industry i.e, the grocer that Jack offer almost £2 cheaper than Aldi. Yes, I believe that Tesco
may retain its market positioning by opening discount or cheapest stores in retailed sector. As
Brexit and covid -19 have resulted in economic slowdown that resulted in less availability of
employment opportunities and decrease in overall disposable income of customers. People of
6

United Kingdom are more prices sensitive that means they can easily select particular firm rather
than another as per changes in price of products (Tesco opens discount store Jack's to take on
Lidl and Aldi, 2019). Or in another words, more and more individuals wants to have products at
lower prices possible to satisfy their overall needs. Thus Tesco through discount chain will
motivates maximum number of individuals to be part of organisation for satisfaction of their
respective requirements. Company strong brand image, quality promise and more market share
will also contribute in adding new and new customer with Jack stores thus leading it one of the
successful strategy of organisation. Tesco have also taken advantages of information technology
to deliver services to large number of customers living in UK or different parts of country. Many
customers are switching form big to budgeted supermarket so it also provides opportunity to
Tesco to enter into discount market to enjoy huge profitability and market share.
5 Is ALDI and LIDI strategy of venture into e – commerce is good idea?
There is huge advancement and innovation in technology thus most of the people are
making use of interne, social media to connect with each others. Younger generation like to have
shopping of products and services through online medium as it provide them ease and comfort to
buy products while staying at home/ office or anywhere. E- Commerce is platform that has
provided customers easy options to select several products and services as per their requirements
and get that delivery at their door steps. Both ALDI and Lidi have decided to first time sells its
products on online platform so that people from across worldwide can review range of products
or services offered by company and select them as per their taste and preferences. Yes, it can be
stated that venturing into e- commerce is good idea or strategy used by both companies in order
to gain competitive advantages or earn more profit. As people spend lot of time scrolling social
media or using internet to share information with each other so it have provide options to them to
have look at existing product or offers of company (Martín, Pagliar and Román, 2019). They
can easily compare and evaluates products on terms of quality and prices thus make accurate
decision to purchase for satisfaction of their requirements. Another reason which stated that e-
commerce strategy is fruitful for both organisations as it is able to expand business with limited
amount of risk and investment. E-commerce is wide platform where Aldi and Lidi can easily
connect with maximum number of individuals in limited time frame. As per my perspective, e-
commerce platform will helps company to develop and maintain strong relationship with diverse
customers that are living across worldwide. Company through ecommerce platform can easily
7

get feedback from customers thus take corrective actions to improve its performance and attain
desired objectives. Aldi and Lidi through ecommerce platform can provide more better or
qualitative experienced to customers thus it will lead to creating more loyal customers within
organisation. E- commerce also contribute in building strong brand image by generating
awareness among millions of individuals. I also think it is effective strategy, As Aldi and Lidi
can easily understand taste and preference of customers through e- commerce thus easily adapt to
external changes and meet expectancy of customer beyond their requirements (Rajkumar, 2016).
Therefore, in short it can be illustrated that as per current trend in external environment and
demand of customers, ALDI and Lidi by deciding strategy of venturing into e- commerce
platform can easily grow and succeed their business operation in near future.
CONCLUSION
It can be concluded from above case study, that Tesco have to faced several number of
problems due to ineffective management of people and use of technology. Aldi and Lidi through
making use of heavy discount marketing strategy is able to compete one of the growing firm
named as Tesco. It can also be summarized that use of Jack as discount chain by Tesco will also
be fruitful as people of United kingdom are highly price sensitive. At last it can be illustrated that
ALDI and Lidi by implementing e –commerce strategy will enjoy huge profitability.
8

REFERENCES
Books and journals
Bronnenberg, B., Klein, T. J. and Xu, Y., 2018. Consumer Time Budgets and Grocery Shopping
Behavior.
Horgan, D.C., 2016 Modelling UK Grocery Retail Sector Market Share Using ARIMA.
Kirby, E., 2016. DESIGNING A LOCATION MODEL FOR FACE TO FACE AND ON-LINE
RETAILING FOR THE UK GROCERY MARKET.
Kirby-Hawkins, E., 2016. Designing a location model for face to face and on-line retailing for
the UK grocery market (Doctoral dissertation, University of Leeds).
Martín, J .C., Pagliara, F. and Román, C., 2019. The research topics on e-grocery: Trends and
existing gaps. Sustainability, 11(2). p.321.
Parker, C and et.al., 2017. Improving the vitality and viability of the UK High Street by
2020. Journal of Place Management and Development.
Pentescu, A. and Paștiu, C., 2020. Retail Evolution in Eastern European Countries: An
Overview. KnE Social Sciences, pp.276-285.
Rajkumar, P., 2016. Factors Determine the Preference of Organised Grocery Retailers in an
Emerging Market. Asian Journal of Research in Social Sciences and Humanities, 6(5).
pp.1018-1029.
Waddington, T.B., and et.al., 2018. Open all hours: spatiotemporal fluctuations in UK grocery
store sales and catchment area demand. The International Review of Retail, Distribution
and Consumer Research, 28(1), pp.1-26.
Zissis, D., Aktas, E. and Bourlakis, M., 2017. A new process model for urban transport of food
in the UK. Transportation research procedia, 22, pp.588-597.
Online
Porter’s five forces analysis of Tesco, 2019. [Online]. Available Through: <
https://howandwhat.net/porters-five-forces-analysis-tesco/>.
Tesco opens discount store Jack's to take on Lidl and Aldi, 2019. [Online]. Available Through:<
https://www.theguardian.com/business/2018/sep/19/tesco-opens-jacks-first-discount-store-
battle-lidl-aldi >
9

10