The role of IT and IS in Tesco
The UK grocery retailing industry is composed of supermarket multiples. Overview: Supermarkets sweep up, (n. d. ) identified the top five to be Tesco, Sainsbury’s, Asda, Safeway and Morrisons respectively. (See Appendix A) There are those focusing on quality ‘niche’ like Waitrose and Marks and Spencer. Others are regional operators like Budgens, Iceland, Co-op. Some are at the cheap end like Aldi, Lidl, Netto. Despite the great number of retailers, the top 5 capture an average market share of 71. 55%. (See Appendix B) Grocery retail industry started with Co-operative Movement in the 19th century.
A group of retailers sold foods at affordable prices. By 1960, the concept of ‘self-service’ stores revolutionized. This further developed into supermarkets and superstores (See Appendix C). By 1970s, supermarkets grew larger into hypermarkets which include non-food items. (Ridge,1998) IT was behind all throughout this evolution. IT changed the way the grocery retailing industry conducted its business. Initially, the industry used IT as a means of improving efficiency. But slowly, the focus has changed from mere efficiency to being the core of gaining competitive advantage.
IT has been present in the grocery industry through ordering systems, hand-held terminals, EPOS (See Appendix D), EDI (See Appendix E) since late 1980’s and early 1990’s. This facilitated the exchange of information between the retailers and suppliers. Suppliers can access paperless information on sales, stocks, and promotions instantaneously. Before, supplier-customer relationships were maintained through personal contact. Now, this relationship is maintained electronically through Extranet. Tesco has its TIE (Trading Information Exchange) system.
IS also facilitated in the stocks management and replenishment enabling the retailers to expand their stores and include more items. Automatic Replenishment Systems makes re-stocking automatic and quicker, with less people involved. IS also enabled them to handle more variety of items from purely canned and processed foods to include fresh agricultural products, frozen foods, entertainment, medicine, insurance, banking, clothes, and are still adding more. It is quite impossible to handle this diverse range of products without IT. Database Marketing was possible through the Loyalty Programs initiated by IT.
“U. K. food sellers increasingly are employing U. S. supermarket technology and services to squeeze every dollar out of the low-margin industry”. (Thorne, n. d. ) Internet and the Web brings new ways of doing business. (See Appendix F) E-commerce brought more sales to the retailers while reducing the cost for a physical store. 20% of Tesco’s sales come from the internet with the remaining 80% from the stores. (Tesco PLC Annual Review, 2002) IT has clearly offered convenience to both suppliers and consumers. (For a detailed analysis of the effects of IT on the business of retailers, see Appendix G)
The retailers depended on IT to achieve key success factors. Relevant sales data were captured through IT. IT helped in forecasting sales and facilitating the order and delivery of goods allowing retailers to stock enough goods on their actual stores, ensuring that product is available all the time at the same time making more space for more products. They also used IT to enormously decrease costs. Use of IT led to reduction of paperwork, wastage, warehousing cost, inventory cost, distribution cost, permitting the provision of competitive prices. All these boils down to one thing: saved resources in terms of time and money.
Savings can then be ploughed back to the business to further build on its competencies. Retailers also rely on IT to cope with future changes in the industry. The UK grocery market is near its saturation. Retailers are constantly finding new ways for growth (Ridge, 1998) and they are using IT as the solution. They have introduced many changes, like on-line shopping, for them to improve sales and customer service, therefore maintain their customers and market share. Retailers receive the advantage of being able to give the customer live data and the latest real-time prices. Johansson (n. d.
) identified that Tesco and Sainsbury, top 2 leaders, opened GlobalNetXchange and WorldWide Retail Exchange respectively, which are electronic and Internet-based market exchanges aimed to reduce purchasing costs and standardize the purchasing process. Retailers are also adding in more products to their business like divorce finalizing and will-writing. (Overview: Supermarkets sweep up, n. d. ) Asda in York has already extended its services to become the First Supermarket-Based Registry Office (BANANAS, BREAD, BEANS AND NOW BABIES, 2002). Grocery retailing industry’s sales grew by 30% from 1995.
In 2000, sales in supermarkets and superstores reached i?? 76. 78bn, a growth of 4. 5% from 1999. (Ridge,1998) This shows the contribution of IT to the industry. The retailers owe to IS and IT what they were, what they are now, and what they will be in the future: a one stop shop where consumers can do their shopping for almost everything. II. IT AS A COMPETITIVE STRATEGY FOR TESCO Tesco, founded in 1924, has been exemplary in using IT to become UK’s biggest food retailer. It enjoys competitive advantage with its strategy of cost leadership, convenience, quality, and service.
First, Tesco was abrupt to change with its environment, keeping a good strategic fit in introducing changes whenever required. As more and more retail stores were created, Tesco moved to centralized decision making. (See Appendix J) Tesco has been excellent in meeting changing customer needs through service and innovation while maintaining its commitment to value and quality. At the same time, Tesco anticipates the future and tries to change the conditions towards benefiting them. Seeing the trend of mobile consumers, Tesco introduced Pocket Ordering.
Tesco has always been the leader in creating new opportunities. Tesco was first to introduce the Loyalty Program. It has now entered the area of banking, producing a card which consumers can use for shopping, banking and buying petrol. (Thorne, n. d. ) This clearly distinguishes them from the others, improving the convenience of the consumers. IT is heavily used as bridge between suppliers and distributors, facilitating distribution’s outsourcing. (See Appendix K) This allowed Tesco to get savings and plough them back on core competencies, deriving more value out of services at lesser cost.
At the same time, Tesco maintained a good rapport with their suppliers and distributors, taking good care of its value chain. (See Appendix L) Use of ECR made Tesco more responsive to consumer demand, eliminating unnecessary costs in the supply chain. IT advanced supply chain management particularly in integrating internal promotions with EPOS, replenishment management and waste management. (See Appendix M) EDI and TIE were essential to quick sharing of relevant sales and market information with suppliers, giving all parties added flexibility.
Through the use of IT, the operational efficiency of Tesco was significantly improved. (See Appendix N) Costs were reduced in warehousing and distribution after proper planning of schedules. Tesco is becoming a one-stop shopping destination, with increased range of products. Quality was demanded from suppliers through bargaining power, convenience increased providing a pleasant shopping environment with the stores offering wider range of products and more space to move around and newer means of shopping, competitive prices resulting from all the savings it acquired through use of IT.
The final factor for being effective in developing competitive strategy was Tesco’s intention to pass on the benefits gained from the supply chain to customers! An analysis of Tesco’s 5- forces model (See Appendix O) will show that the bargaining power of buyer is HIGH, while that of the supplier is LOW-MEDIUM. Threat of Substitutes is MEDIUM – HIGH, while threat of entrants is LOW. Competitive Rivalry is LOW-MEDIUM. Only bargaining power of supplier and threat of substitutes, which should have been high and low respectively, fell below the ideal setting. Tesco has indeed very well managed its competitive environment.