MGT501 Business Environment Assignment - Environment Scan Part B

Laureate International Universities, Australia

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Learning Outcomes - This assessment addresses the following subject learning outcomes:

a) Critically evaluate the effect of the external environment on firms.

b) Select and apply appropriate frameworks to resolve the challenges faced by firms.

c) Analyse and synthesise industry specific factors in the context of firm decision-making processes.

Instructions: Part B of the environmental scan is aimed at proposing solutions to the environmental challenges faced by firms. Using the tools and frameworks provided in the content of the subject, you must:

• Discuss general and historically relevant responses to the four types of factors which can influence the environments in which businesses operate.
• Categorically and comprehensively respond with a solution to all of the environmental risks and challenges laid out in Part A.

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Answer -

Introduction

Contemporary business could not ignore the environmental risk factors that put a negative impact on the business. Public opinion, competitor strategy, economic policy, government regulatory and customer behavior influences the organization's success. Hence, the paper will identify the risk factors that affect the business to a great extent. The risk factors create numerous challenges for the company as well as decreases its profit within the marketplace. It will present the environmental factors that cause various issues which need to be fulfilled by an organization. The paper will also provide risk mitigation strategies that are beneficial in overcoming with the identified risks.

Background of Tesco

Tesco is considered to be a British multinational general merchandise and groceries retailer. It has been found in 1919 whose headquarters is located in Welwyn Garden City, Hertfordshire, England, United Kingdom. It is the third largest retailer worldwide as measured by gross revenues and the as per revenues it is the ninth-largest retailer in the world (Tesco :: Online Groceries, Banking & Mobile Phones. 2019). It possesses around seven shops in seven countries across Europe and Asia. It is the market leader of groceries in Thailand, Hungary, Ireland and UK. There possess 476,000 number of employees in the company whose annual revenue in 2017 is estimated at £55.9 billion. The organization supplies its product in convenience shop, superstore, hypermarket, and supermarket. It has diversified into several areas such as retailing of toys, furniture, electronics, internet services, books, petrol, software and many more (Thyberg & Tonjes, 2016). The company has been listed on the London Stock Exchange where it has a market capitalization of around £18.1 billion.

Identified Risks

Tesco is considered to be a supermarket giant with a clear vision and mission statement to increase the pre-tax profit of 2.6 billion pounds and 67 billion pounds. Tesco's share price comprises 322 pence and its dividend yield of 4.8%. But for most of the investors investing money in Tesco could impact the wealth of the investors. Due to this Tesco is dealing with three major risk factors such as performance risk, reputational risk, and political and economic risks. Tesco is under pressure due to declining sales growth which puts the business at risk. The company also fails to fulfill the stated strategy due to which business faces an economic downturn that affects consumer spending (Yan, Bastian & Griffin, 2015). The company also fails to protect its brand reputation that could result in loss of confidence and trust that would affect the ability to retain and recruit good people. Tesco is at high risk as it affected by tax, regulatory and legal changes as well as economic and political development. The company also faces the principal risk that may put an adverse effect on business. Moreover, it faces various challenges within the market such as technological risk, competition within the market, safety risk, regulatory and compliance risk, data privacy and security, a transformation of an economic model and liquidity risk. All these risks factors make the company face a number of challenges within the market and it also puts a negative impact on a company's revenue (van Ruth, Huisman & Luning, 2017). Apart from this the environmental factors also create a huge amount of risk for Tesco.

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PESTEL Analysis

The environmental factors that create great risk for the company are political, economic, social, technological, environmental and legal factors.

Political factors - The United Kingdom is one of the most powerful countries in the world whose political stability is its great strength. Tesco is affected by various political factors such as economic condition, unemployment rate, political instability, impending legislation, and tax rates (Lefebvre, Langrell & Gomez-y-Paloma, 2015). For example, import duty on products may put Tesco on high risk as it imports most of the inventory outside the UK like East Asia and China.

Economic factors - UK is regarded as the 5th largest country in the world whose GDP rate is 2.62 lakh crores USD in 2017. The UK supermarket is greatly affected by labor cost that also affects Tesco. For example, in 2018 the minimum wage rate of UK has increased by 4.4% for 25 years old and onward. This increase in the labor cost has made Tesco invest millions of pound in the UK. This had decreased its profit and increased prices and cost of products (Drawve, Thomas & Walker, 2016).

Social factors - The changing consumer shopping trend is one of the major risk factors in the UK that affects Tesco to a great extent. Customers seek instant delivery along with flexible products and return policy. If Tesco would not satisfy the customers as per their changing behavior and demand it would face great risk as it will affect the reputation and brand of the company (Friel & Ford, 2015).

Technological factors - The UK is determined as one of the most technologically advanced countries across the world. However, UK is falling behind Japan, India, South Korea, USA, and some other technologically developed country. Due to this Tesco is facing problems such as horsemeat scandal and poor customer experience.

Environmental factors - Economic activities put an impact on the environment of UK due to which Tesco is facing huge pressure from government agencies to fix the environmental problems (Chkanikova & Mont, 2015). Sometimes the UK faces challenges due to unfavorable weather conditions that affect the delivery of the products.

Legal factors - The UK comprises of various laws that prove to be beneficial for the organizations to operate their business. The country faces changes in the legal environment that affects business performance of Tesco due to which it becomes difficult for the company to achieve its targets. For example, Tesco faced legal actions for misleading the investors and accounting fraud that created a huge amount of risk for the company (Tzamalis, Panagiotakos & Drosinos, 2016).

Porter's five forces model -

Competitive rivalry - In the food and grocery industry, competitive rivalry is extremely high due to which Tesco encounters strong competition from its competitors such as, Waitrose, Morrisons, Sainsbury, and Asda. The companies are competing with one another over promotions, products, and price intermittently. Increasing market shares have created a competitive market rivalry that threatened the market leadership position of Tesco which is a great risk for the company (Benedettini, Neely & Swink, 2015). Thus, the company faces stiff competition from its competitors in the supermarket

Bargaining power of suppliers - In the food and retail industry, the bargaining power of suppliers is very low. Tesco faced poor supplier treatment that grabbed the attention of huge media coverage that damaged the image of the brand. This had also affected supplier relationship practices within the organization. Tesco revealed the fact that 58% of the suppliers were unsatisfied with their relationship with the organization.

Bargaining power of customers - Buyer power affects the quality of goods, customer service and price of the products. All these factors strongly affected Tesco consumers. In the retail market, Sainsbury and Asda mainly focus on those who possess less disposable difference that created greater strain for Tesco (Chen, & Kwan, 2015).

Threat of new entrants - In the food retail industry, the threat of new entrants within the market is low. Tesco has encountered a threat of new entrants such as, Aldi and Lidl who delivered high-quality goods to the suppliers that created a high risk for Tesco of losing more number of suppliers. This made Tesco lose a number of customers as they find a quality difference between their products and the products supplied by new entrants such as Aldi and Lidl.

Threat of substitution - In today's business context the performance of substitute has increased where Sainsbury and Asda managed to obtain 10% of the grocery market. This puts Tesco in a huge risk where it requires to maintain profitability (Marques, Critchley & Walshe, 2015). The cost of change is relatively low for Tesco consumers that affect Tesco's entire power on the high street.

Risk Mitigation Strategies

Tesco, one of the leading grocery retail industry encounters various risks while operating its business in the UK. Several risks factors affect the business due to which Tesco fails to fulfill the needs of the customers that create barriers for the company to achieve their objectives. In order to overcome with all the risks factors, Tesco had developed a risk management policy that monitors the risks identified by the business. The identified risk factors put an impact on the financial performance of the company that could be solved with efficient use of risk management policy (Parenreng, Pujawan, Karningsih & Engelseth, 2016). To overcome with performance risk the CEO of Tesco sets clear goals and objectives along with a high proportion of reward related to the achievement. Additionally, the executive committee and several organizational committees of the board regularly meets to review performance risks as well as monitors the performance on a regular basis. Tesco also addresses reputational risk by following regular stakeholder engagement and communication to understand the views of stakeholders and present them in a company's strategy. Tesco carefully considers external uncertainties while reviewing performance and developing strategies that help in overcoming the political and economic risks (Singleton, Affuso & Sen, 2016). The company tries to contribute and anticipate significant changes in public policy that develops business through diligence work.

To enhance an understanding of the customer needs the company has developed strategic plans. Customer insights help in the development of customer-focused strategies within the market hence, Tesco has developed strategic customer profile to understand the expectations of the particular market. Meanwhile, significant transformation programs have been developed across the Group that includes cost reduction, reset of supplier relationship, people and capability, data strategy and organizational design. Such transformation programs reduce cost and improve margin and sales. Tesco Bank is separated financially from Tesco PLC, where Tesco PLC Board and Tesco Bank Board regularly reviews bank risk appetite of Tesco (Macfadyen et al., 2015). This helps Tesco to overcome their key risks such as controls and tolerance, alert limits and their optimum ranges. It also ensures Tesco regarding ongoing awareness of any potential risk. Ownership business plans and executive oversight presents strategic direction for the Group that regularly reviews the challenges faced by the company. The principal risk encountered by Tesco is recorded in a Group Risk Register which is discussed through regular meetings with the senior management team and reviewed by the Executive Committee. Standardized recruitment processes and policies have been developed and Board- sponsored people strategy has been applied to attract and retain best people (Marsden & Arce, 2017). Implementation of all these strategies helps Tesco to overcome the risks that it faces while operating its business.

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Recommendations

In order to overcome the principal risks faced by Tesco, the following recommendations could be made for Tesco to gain profit and establish its business in the international markets. As the company has been costly in the past hence, it must develop Greenfield investment strategies that would help the company to overcome the risks. It must focus upon the needs of the customers and provide appropriate responses to their demands. For example, the organization must enhance customer database and market intelligence to provide customized delivery to the consumers. To handle the legal issues Tesco must develop its operations based on a strict code of practice of Food Retailing Commission (FRC). The environmental risks of the company could be resolved by using renewable resources and generating 100% of its electricity. Thus, the company must minimize the use of carbon footprint to resolve environmental issues.

It has been observed that around 65% of UK shoppers are loyal, therefore Tesco must utilize this opportunity to develop one to one connection and close ties with the customers. The generation of risk due to social factors could be resolved if Tesco determines the changing behavior and demand for organic food. As Tesco is entirely dependent on UK customers thus they must understand and facilitate high-quality services to deal with such social issues. The company should concentrate on increasing borrowing cost in the UK that will help the company to protect its cost leadership strategy and brand reputation. Following all the recommendations efficiently would be helpful for the company to overcome the risks factors

Conclusion

The paper identified the risk factors of Tesco that affected its business to a great extent. It provides details about the environmental risk factors that put an impact on the organization's success. It has been observed that Tesco faces various risks that affect brand reputation and trust of the customers. Therefore, it becomes necessary for the organization to address the issue of risk. The paper helped in analyzing the risk management technique that helps in dealing with the issues faced by the company. It also provided recommendations to increase profitability, protect brand reputation and avoid price hike to operate a successful business.

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