Financial Analysis of Tesco Plc organization

 

 

Porter’s 5 Forces Model

It is a way to examine threats to a company’s success – which was competition imposes (Porter Michael E., 1998)

Bargaining power of customers affects the customer’s sensitivity to price changes. The bargaining power of the customers is at the medium level for Tesco because it has strong reliable reputation and customer loyalty using loyalty cards.

The threat of substitution in an industry affects the competitive environment for the firms in that industry and influences those firms’ ability to achieve profitability. Tesco offers unique products with worldwide fame, so the threat of substitution is significantly reduced. The differentiation of products is significant because the more alike two products are the easier it is for a customer to simply substitute a different product in its place without even noticing a difference.

Bargaining power of suppliers. Tesco has global supply chains that help to develop businesses of delivering reliable, innovative and great value brands for customers. The Tesco’s inventory turnover rate is high, so purchases that will be made by suppliers to replenish that inventory giving the purchasing company more power over the supplier.

Threat of new entrants largely depends on the barriers to entry. When customer loyalty is high within an industry, new entrants face an extremely difficult challenge to get competitor’s existing customers to switch over to their company.  In this case, the new company would have to rely strictly on a high level of differentiation in order to gain any of those customers.  Tesco operates in the market of high barriers to entry.

Rivalry: Such retail companies like Wal-Mart, Carrefour, J Sainsbury and ASDA are the competitors of Tesco Plc.

  

 

 

Tesco Accounting Policies

Tesco accounting policies adopted by the company are in general in line with industry norms and practices and that there is no specific policy which may make the comparison of some ratios or performance irrelevant merely sue to way it is applied. Until 2005, TESCO was reporting financial results in line with UK GAAP but from 2006 onwards, financial reports have been issued in accordance with IFRS which is now mostly adopted standards in almost 100 countries including EU, India, Australia, Russia, GCC, Singapore and other countries. All European companies, except Wal-Mart, have used IFRS (Tesco, Sainsbury and Carrefour).

No major differences in accounting practices are found between Tesco and its peers/competitors including J. Sainsbury and Carrefour. All of them use a straight line depreciation of definite-lived intangible assets (licenses or software etc.). For R&D Expenses, these are amortized over project’s useful life.

Stocks comprise goods held for resale and development properties and are valued at the lower of cost and net realizable value. Stocks in stores are calculated at retail prices and reduced by appropriate margins to the lower of cost and net realizable value.

Plant, equipment and fixtures and fittings which are the subject of finance leases are dealt with in the financial statements as tangible assets and equivalent liabilities at what would otherwise have been the cost of outright purchase. Rentals are apportioned between reductions of the respective liabilities and finance charges, the latter being calculated by reference to the rates of interest implicit in the leases. The finance charges are dealt with under interest payable in the profit and loss account. Leased assets are depreciated in accordance with the depreciation accounting policy over the anticipated working lives of the assets which generally correspond to the primary rental periods. The cost of operating leases in respect of land and buildings and other assets is expensed as incurred.

 

 

 

 

Conclusions

On the basis of performed analysis for Tesco Plc, it has been identified that the company is successful enough in attaining its strategic objectives to a greater extent. The entire analysis leads to the mitigating strategies for high risk components to the development of certain recommendations for the company on the basis of SMART criteria which are highlighted below:

• In the future it would be profitable for company to expand the assortment of products that lead to usage of such growth strategy as diversification. Trust in the Tesco brand enables company to grow its existing business, as well as diversify into new business areas such as personal finance and bioproducts.
• The major core business of the company is retailing. Tesco has developed its reputation from its performance in the UK market. As a result, the company should aim at paying higher attention towards further developing its core business.
• Lack of adequate marketing approaches is another major weak point of Tesco Plc. As a result, it has also been highly recommended to pay more attention to the effective marketing approaches in order to provide with better promotion of all its business segments and the attainment of its strategic objectives.
• Tesco should also increase the number of stores in low income Communities since the company strongly highlights its commitment to food access in low income Communities.  For effective implementation of this strategy, increase of stores in low income areas will be seen as a boost to its presence in the Community thereby increasing and creating customers’ retention.

References

Finch, J. 2009. Tesco increases market share [Online]. Available at: http://www.guardian.co.uk/business/2009/nov/10/tesco-waitrose-win-market-share [Accessed: 26 September 2011].

Griffin, R.W. 2008. Management. (9th ed.), Cengage Learning.

Kennon, J. Working Capital: Investing Lesson 3 – Analysing a Balance Sheet [Online]. Available at: http://beginnersinvest.about.com/od/analyzingabalancesheet/a/working-capital.htm

Kotler, P, Armstrong, G, Wong, V & Saunders, J, 2008. Principles of Marketing, 5th European Edition, Prentice Hall.

Lancaster, G. & Reynolds, P, 2005, Management of Marketing , Burlington: Butterworth-Heinemann.

Porter Michael E., 1990. The Competitive Advantage of Nations. Free Press, New York: Free Press.

Taking Tesco global, 2011 [Online]. Available at:   http://www.mckinseyquarterly.com/Taking_Tesco_global_1221 [Accessed: 26 September 2011].

Tesco Plc, 2012. Accounting Policies [Online]. Available at: http://www.tesco.com/investorInformation/report97/accounts/page11.html

Tesco Plc, 2012. Investors – Reports [Online]. Available at: http://www.tescoplc.com/index.asp?pageid=166

Tesco Plc, Annual Reports and Financial Statements 2011, 2011 [Online]. Available at: http://ar2011.tescoplc.com/business-review/growing-retail-services.html [Accessed: 26 September 2011].

Tesco Plc, Corporate Responsibility Report 2011 [Online]. Available at: http://www.tescoplc.com/media/60113/tesco_cr_report_2011_final.pdf [Accessed: 26 September 2011].

Tesco Plc., 2011  [Online]. Available at: http://www.tescoplc.com/about-tesco/our-strategy/ [Accessed: 26 September 2011].

Wilson, R. M. S & Gilligan, C, 2005, Strategic Marketing Management: Planning, Implementation and Control 3rd ed, Butterworth-Heinemann.