Topic 3 –
Burdekin (2011) describes dynamic business environments as
being ‘full of uncertainties’ meaning that businesses must develop an ‘ability
to reply to changing trends’. This fundamental principle would allow businesses
to ‘sustain within the competitive business environment’. To ensure that an
organisation can adapt to these changing trends, they must analyse recent
trends and deduct potential future trends from these in order to ensure they
could more easily adapt. A suitable analytical method to review trends that
organisations may use is PEST. A PEST analysis ‘provides an analysis of four of
the key macro level factors that affect a business and the decision which it
makes (Grant, 2008)’. This essay will apply the PEST to the international supermarket
Tesco and its subsidiaries, focusing on its operations within the UK.
Statistical data and other such information upon which this assignment is based
originates from a variety of sources including the company’s annual report (Tesco,
2017) as well as information from academia, journals and business reports.
As of present, Tesco are affected by a plethora of political
factors that may also create problems for the company in the near future.
Firstly, a key political influence which affects Tesco is the rate tax rate levied
by the government, specifically in the UK. This could potentially affect both
the bottom line of the organisation in terms of the corporation tax they would
be due to pay, but also the ability for customers to spend as with high income
tax rates, possible customers would have less disposable income that they could
spend on non-essential, luxury items such as some of those sold by Tesco. However,
due to a rise in corporation tax receipts from UK businesses by 21% on 2016
(Financial Times, 2017), there is not a guarantee that the current rate of
corporation tax will be maintained at the same level.
Furthermore, another key political factor for organisations such
as Tesco to consider is interest rates. At present, the UK interest rate stands
at 0.5% (BBC, 2017). Despite the recent slight rise from 0.25% to 0.5% being
the first in 10 years, it is still relatively low in comparison to 2005 and
2006 in which the rate stood at around 5%. Therefore, this could be regarded as
a positive factor for businesses like Tesco who can essentially borrow large
amounts of money with the purpose of capital expansion at low rates. However,
with low interest rates, it can be argued that consumers are less likely to
make purchases as they have not been able to develop interest on their savings
and as a result, do not have the disposable money for which to spend on ‘luxury
items.’ On the other hand, Tesco would more than likely see even fewer
purchases at times of high interest rates as people are then more likely to
invest their savings to increase the amount, therefore tying it up in bank
accounts, instead of it being used to make purchases. This therefore enforces
the idea that the current interest rate is a positive factor for Tesco.
A further political issue relates to the recent Brexit
referendum. For a UK based company such as Tesco who has international
operations within the Euro Zone, this could be seen as negative with the potential
of additional transaction costs which could be enforced by not being within the
EU. However, due to being under both UK and EU law, stricter laws may come in
following the exit from the EU. For example, a key piece of UK legislation
which affects organisations such as Tesco who have a large number of low paid
workers is that of minimum wage regulations. This states that UK employers are to
pay their employees aged 21 and over a minimum of £7.38 per hour from April
2018 (Gov UK). Due to the large number of employees working for firms such as Tesco
which are affected by the National Minimum Wage, any temporary alterations in
legislation can have a high impact upon the sector.
A critical economic factor which could impact upon Tesco in
the UK is the current state of the economic environment. As a business which
makes use of a non-cost leader strategy, it can be argued that adjustments and
changes within the economic environment have the potential to impact on the
revenue of the business on a larger scale than those operating in the ‘necessity
and budget sector of the market (Johnson et al, 2008)’.
Based solely in a statistical stance, the economic
environment of the UK has been substantially turbulent since 2007. Following
the global financial crisis in 2007, 2008 saw the nations GDP spiral into the negatives
with -0.5% contraction in the economy (ONS, 2016). 2009 then saw this spiral
worsen considerably as the growth fell to a shocking -4.2% contraction. Since
then, the eight years following have seen levels of growth in GDP consistently
in the positives ranging from the 1.5% of 2011 to the 3.1% of 2014. These most
recent figures seem to display a positive image for supermarkets such as Tesco
who are reliant on the UK economy as a source of revenue.
Moreover, an analysis of more detailed economic data could
indicate furthering strengthening in Tesco’s position regarding the current
economic environment being a positive one. The Office for National Statistics
(ONS) provides data looking at the rate of unemployment as well as the average household
disposable income in the UK. The rate of unemployment has been decreasing in
consecutive years since September 2011 from 8.5% to the current 4.2% rate of
unemployment (ONS, 2017).
In addition, the levels of household disposable income during
the same period has consistently risen from £14,308 per household in 2007 to
£16,042 per household in 2011 (IBID). This means that there is more disposable
money within the economy to be spent, potentially on non-essential items,
proving beneficial for Tesco.
For Tesco and other supermarkets this could have a key impact
upon their strategy. As a result of falling unemployment, there may be more
customers able to purchase the products and services of Tesco. Furthermore, as
suggested by the figures regarding disposable income, those who have stayed within
employment have typically become wealthier. Following this, it is likely that
such patterns in the economic environment could benefit Tesco in improving
their customers spend on top of gaining more customers.
The UK is experiencing a wide range of social and cultural
changes as of present that may have substantial impact on the performances of food
retailers such as Tesco.
A main socio-cultural factor is that of the cultural
diversity of the UK since the migration of workers needed following World War
Two. This helped the UK become a nation with a plethora of diverse races,
cultures, beliefs and ethnicities. This has ‘contributed towards the socio-cultural
backdrop of the UK social system (Shepherd, 2010)’. For Tesco, this provides
potentially unwanted implications such as the aligning of specific ranges to
specific cultural segments. As well as this, the business must also make sure
that it deals with issues that are a potential source for conflict (Ivancevich
et al, 2010). A recent example in which conflict occurred due to careless
planning and cultural ignorance is that of H&M in which they released an
‘advert showing black child wearing monkey jumper’ (Independent, 2018), causing
anger amongst some who branded the advert ‘racist’. The advert created such
conflict even on the scale of having a store destroyed in South Africa as a
result (BBC, 2018).
However, it must be considered that as the UK plans to leave
the EU, enforcing stricter immigration laws concurrently, there is a strong possibility
that the trend for increased diversity in the UK’s consumer market will decrease.
Additionally, the ageing population is seen to be an issue in
the UK market. (Guardian, 2017). This has been deemed both problematic and
opportunistic for Tesco. The problem arises from the fact that Tesco may be
required to adapt its product portfolio in order appeal to the older demographic.
Furthermore, an ageing population may also see more intensity and
competitiveness within the market of the younger demographic.
However, something to consider is that due to an ageing
population, Tesco could see an influx of online sales as their website offers
the perfect solution to the potential mobility problem of an older demographic;
instead of walking for a long time to find something, it can be quickly found
online. However, this comes with the stereotype regarding the older population
and their lack of knowledge of technology. Therefore, in order to ensure they
take advantage of the opportunity, Tesco should provide an easy to navigate
website to boost their online presence.
It cannot be strongly argued that there has not been
overwhelming transformations within business in the UK and worldwide due to new
technological advancements and developments. Jobber (2007) described key
developments as ‘those technologies which are internet or communications based
in nature, such as the wide spread diffusion of broad band’.
Key technological developments that now seem basic, even
essential to a businesses success such as the internet have allowed firms such
as Tesco to create an online presence which ties hand in hand to the more
traditional establishments and physical stores. ‘As of 2015, roughly 80 percent
of UK internet users did online shopping (Statista, 2016),’ with online retail
sales making ‘up 15.2 percent of all retail sales in the UK as of January 2017
(IBID)’. These statistics show that online shopping is an ever increasing inevitability,
giving evidence that businesses need to focus on this in order to ensure they
are not left behind their competitors.
However, simply having an internet store presence is no
longer enough as developments which allow customers to interact with retailers
and vice versa using online social networking sites such as Facebook, YouTube
and Twitter have become prevalent. ‘These are now seen as key ingredients in
the development of a successful marketing strategy (Zarrella, 2010)’. These
have resulted in more effective communication between customers and businesses.
For example, smartphone ‘apps’ are able to help customers find their nearest
store or check for the availability of a product before travelling there. This
acts as a bridge over the two functions of the business; online and physical.
However, technology also comes with risk. As businesses focus
on developing their online presence, they may lose focus of their stores,
potentially resulting in them falling victim to technological developments (Goodley,
2013). Tesco must ensure that they do not suffer to this as they attempt to
strengthen their ‘Tesco Mobile’, ‘Tesco Insurance’ et cetera. A strong example
of a company who failed from this is Blockbusters who fell into administration
following the advancements of online streaming and companies such as Netflix
and even Sky Movies despite the offer by Netflix to form a partnership.
Finally, companies such as Tesco have a responsibility to not
exploit automation in which jobs are lost and replaced by robots or automated
machines. This is often used as in the long term it is cheaper than hiring an
employee. Common examples of it are the occurrence of robots on production
lines and self-checkouts at most supermarkets. Although in the short term this
may sound beneficial to a business, it results in higher unemployment rates and
therefore less earners, making fewer people able to purchase products in the
future, which has the potential to cripple the economy.
Having analysed the key factors regarding macro level environment
as in the PEST framework, it is possible to form numerous conclusions relating to
the model to Tesco. To some it would seem that the external environment is a challenging
one for Tesco with the requirement to adhere to arguably tough legislative
factors, as well as the possibility of being required to expand their portfolio
to suit the growing cultures within the UK. However, the PEST factors also show
there are opportunities for Tesco in the UK. These include the ability to borrow
at low interest rates to fund capital expansion and opportunities to use
technological developments to drive more sales through web based platforms. Having
come to these conclusions, the environment is positive for Tesco currently and
that further success of the business will be dependent upon whether the
business capitalises upon the stated opportunities or risk falling victim to a
dynamic business environment.
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