This is solution of UKCBC Business Environment Assignment, taken from BTEC HND Business Course. This Unit is part of both certificate and Diploma course. Here UKCBC stands for UK college of Business and Computing.
Every Organization is established on the basis of the purpose which stakeholders want to fulfil. This purpose of the Organization is the key element of any Organization to develop its strategies on that. Most of the Organizations are established with an objective to earn profit while there are some Organizations which tend to some other purposes, like NGOs. When there are so many stakeholders associated with the Organization, it is not very easy to define a purpose and strategies to meet that purpose. Other than the stakeholders there are many other factors which affect the purpose, like taxation and government policies, marketing environment and competition in the same segment (Woods, 2007, pp. 1080).
LO1 Understand the organizational purposes of businesses
P 1.1 Organizations and their Purposes
These are the condition which plays important role while developing a strategic plan for any Organizations.
Let us examine the purpose of some Organizations:
- Virgin Group Limited
Virgin group was founded by young Richard Branson at the age of 17. The initial purpose behind the company was student awareness and stared with a student magazine and Student Advisory Centre. Once the initial venture was successful, Branson moved towards the profitable business. In 1970, he started Virgin Mail Order venture where he sold cut price records by post.
Right now Virgin group has been converted into a big investment company which has many businesses like Travel, Finances, Health, Mobile and some more profitable businesses. The most dedicated business purpose of the virgin group is financial capital investment.
- Tesco PLC
Tesco was established by Mr Jack Cohen. He started his grocery business selling items on a stall. But right now Tesco has thousands of stores in the UK and also established some facilities outside UK.
The purpose of Tesco PLC was to become the biggest retailer in United Kingdom and they have been doing very well in achieving this purpose. Tesco shook hand with a big tea company, TE Stockwell which helped Tesco a lot in exponential growth. Tesco has more than 250,000 employees all over the UK and more than 440,000 around the world.
McDonalds’ purpose has always been to become the favourite place for the customers. Although this purpose finally leads into the profit only, but setting an objective in this manner is more ethical and attracts the customers to the Organization. They have been doing all that can be done to achieve this purpose and also becoming successful in achieving the same.
- National Health services (NHS) UK
National Health Services (NHS) UL is one of the biggest public health care Organization. The purpose of the NHS is to get everyone in the UK health services whether the patient has the money or not. Since NHS is funded through the public taxation system, budget is not a problem for them and this is the reason NHS has been justifying its purpose for so long. After 1948, they have started for some services which are very costly outside but still they take very less amount for that.
- John Grocery Store
John Grocery Store is a store near my home. This shop was opened with only one purpose – earning the big profits. But to do that, shop has to get the trust of the customers who stays near the shop and the prime customers. To do that, John initially sold the products on less than MRP rates and then gradually increased the rates when people got accustomed to buy their all the items from John Grocery Store.
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P 1.2 Tesco and its Stakeholders
There are two types of stakeholders associated with Tesco PLC. The first one is internal stakeholders and the second is external stakeholders. The internal stakeholders ate the people who have invested the money into the company and their objective is to get benefited by the profits of the company. The external stakeholders are the customers who use the services offered by the Tesco PLC (Dolan & Humphrey, 2000, pp. 161). Their objective is to be treated in a well manner and gets the services from Tesco on cheaper rates than the other companies in the market. But whatever is the stakeholder type, both of them have the control over the company. Internal stakeholder may possess the power in the company by which he could control the strategies of the company, but that depends on the stakes he has in the company. On the other hand external stakeholders do not have any such power but they are the only reason because of company is able to get profited.
Tesco adopted the scheme of paying the dividend to its stakeholders to meet their objectives. A dividend is an amount which is given to the stakeholders from the profits of the company on the basis of the shares of the stakeholders in the company. But this dividend scheme is applicable only in the case when company is earning the huge profits and it is declared by the mainly the board of directors of the company.
P 1.3 Responsibilities of the Tesco PLC
Tesco PLC has many responsibilities. Some of these responsibilities come under CSR or corporate social responsibility. Organizations as big as Tesco has mainly three types of responsibilities:
- Responsibility as an employer
- Responsibility as a service provider.
- Responsibility as a Business
As an employer, Tesco is supposed to take good care of all its employees. To do this, Tesco have implemented many Human Resource management techniques and policies which helps the company in improving the benefits to the employees and also to make them feel secure. As a service provider, Tesco has to take care of all its clients. Tesco has been doing that by providing them good quality products on lesser rates and also providing a range of products to choose from. As a business, Tesco’s responsibility is to take care of the stakeholders of the company who has invested their hard earned money in the business. In return of their investment everyone expects good money from the business and using the dividend scheme, Tesco is taking care of its responsibility towards the business and stakeholders (Gillespie, 2013, pp. 87).
LO2 Understand the nature of the national environment in which businesses operate
P 2.1 Economic Systems
Economic systems play a very important role in the growth of any business and especially if the company is a multi-national company, it becomes essential to study the economics of the area where company is operating. After a good understanding of the economy only, proper resource allocation could be done. Basically there are three types of economic systems – Free economic system, Command economic system and mixed economic system. These three types of systems decide the resource allocation for the company.
Free Market Economy
The ownership is the basic characteristic of the free market economy. Most of the companies are owned by the people without much interferes of the government, but it is the other people who provide the resources are the actual owners. For example, Richard Branson is the owner of the Virgin Group because he has the majority of the shares of the company. In this particular example of Tesco, Richard Branson might transfer his rights of ownership to someone at his free will and the government will have no say in the matter.
Another characteristic of the free market economy is that it is not the company who decide what to be produced. Though it seems strange, but it is the end user or the customer who make the company decide what to produce. If the companies would produce some product which is not in demand, they would go in loss. Hence, customer has the ultimate power to decide what would be produced by the company (Burt & Sparks, 2003, pp. 239).
In Free market economy, resource allocation is also in the hand of customers, because companies have to do the resource allocation in a way that they could provide the cheaper product to the end user in the competitive market.
Command Market Economy
Command Market Economy is completely opposite of the free market economy, where government has the full control of the market or a segment of the market. All the productions are owned by the government or by the State publically. While in free market, owners work for the self-interest and growth, in command economy, the three pillars of the economy; government, workers in the company and the end users work in co-ordination for the good of all three. Communist Soviet Union was a good example of command market economy.
The main characteristic of the command market economy is that the element of competition is completely absent and due to that there is no specific mechanism for deciding the price of the products. The government sets the price. But they have to make sure that the price is not very much, because it could give birth to black markets.
Mixed Market Economy
Mixed Market Economy is a mixture of both, free market economy and command market economy. Some segments of the market are owned by the government while rests are privately owned. The percentage of the market owned by these two parts differs country to country and there is no standard for resource allocation also. In this type of economy, the competition is basically among the private companies while government makes sure that competition does not reach to the limit where consumers have to suffer with the quality of the products. Sweden is a very good example of the mixed market economy.
P 2.2 Fiscal and Monetary policies of UK
Every government needs the funds and money to run the country and fiscal policies are the one which get these funds to government. Taxation is the one big factor which contributes a lot in the fiscal policies of the government. Through taxation government charges the companies, different taxes like sale tax etc. In case of Tesco PLC also, they have to pay these taxes as per the policies (Smith, 2004, p. 543). These taxes affect the company profits and to minimize these effects, Tesco add some of these taxes in their production cost. On the other hand, monetary policies are the policies through which government controls the flow of money or in other words, the flow of currency. Through monetary policies, government always tries to keep the inflation under control and also advised by the Reserve Bank on the policies. Tesco has to act according to the monetary policies of the government when it comes to the investment part and also taking the money as loan from reserve bank for the growth of the business. Sometimes reserve bank charges higher rate of interest on the loans according to the demand of the economy of the country. In these situation, the cost of production for Tesco PLC is increased which directly affects the sales of the products and hence reduce the growth of the company.
P 2.3 Competition Policy and Tesco’s Activities
In today’s business environment, competition has become much aggressive than the older days. In a particular segment of business, there are so many companies with so many products, that it becomes essential for a company to get some kind of innovativeness in the strategy. But competition also causes many problems in the business world. It creates unlawful merges, black market and also the wrong approaches to hire the good talent. Competition policies take care of the market and make sure that these kinds of activities are under control. Unlawful merges are also controlled by the competition policies, so that the small businesses could survive and grow (Nordås, 2008, pp. 98). Competition policies also control the prices in the market and see if any company is creating the false shortage of a product in the market to increase the product price and thus control the monopoly in the market. Tesco also has to follow these competition policies and adhere to them. Tesco already keeps the price of their products reasonable and due to this does not have to worry about the price controlling competition policies. Now Tesco has reached to a position where they do not have to go for unlawful practices to compete in the market and thus manages very well with competition policies.
LO3 Understand the behaviour of organisations in their market environment
P 3.1 Market Structure and its impact on Tesco
Today’s market could be divided into the below four segments, which also defines the structure of the market in the retails industry. Since Tesco is in the retail business, below structure is also applicable to Tesco.
- Pure or Perfect Competition
- Monopolistic or Imperfect Competition
This market structure is based upon the type of competition in the market which every business has to face in their segment. Although, market structure could also be defined on the bases of the customers or the end users but economists prefer the structure based upon the sellers or the companies. In the Pure structure, there are many Organizations working in the same field and there is also place for the new and small companies. In the Monopolistic segment, many companies deal in different lines of the business. In Oligopoly, the number of companies is less and they might be dealing either in the same business or different business. In monopoly, a single company owns the market and there is no place for new entrants.
The UK government always tried to settle the market as a pure market, where no single company owns the market and there is a fair competition among the companies (Dolan & Humphrey, 2000, pp. 161). The government has established regulatory mechanisms and competition policies to make sure that. Tesco also adhere to these policies and always go for pure competition. There are 4 major retailers in the UK market, namely – Tesco, ASDA, Sainsbury and Morrisons. If these 4 retailers go for the monopoly on the market, the complete structure could fail and end users might end with nothing in their hands. To avoid this and adhere to the competition policy, Tesco and other retailers has adopted the uniform pricing system where common products have almost same price. Now, when the pricing is not able to make a difference, Tesco has to adopt some other measure to increase their output. To do that Tesco implemented supply chain management, automation of the manual process and more skilled labour than the competitors.
P 3.2 Market and Cultural Forces and their effect on Tesco
How different market forces the shape of Tesco PLC business could be analysed using the below mentioned PESTEL analysis, SWOT analysis and Porter’s Five Forces model:
- Political Forces - Government always tries to implement their policies on the market, e.g. government supports the mixed job opportunities by the companies. Tesco adhere to the policy and employs many students, disabled and aged people but also pay them less than the skilled and younger labours, which is allowed by the government.
- Economical Force - Tesco is very much affected by the high unemployment level because demand is decreased. Although company is doing good in other countries but still their base market is UK and effects of any slowdown might affect the business in the country.
- Social and Cultural Forces - People are now moving towards the packaged food which they could use as their daily meal and avoid preparing the meal at home. To meet this challenge, Tesco has to provide the product which constitutes the whole meal and could be used daily.
- Technological Forces - 21st century is the century of online shopping. People are already buying their clothes, shoes, accessories, electronic item and lots of many other products. Other than this there are many other technologies like digital scales and RFID devices which affect the business.
- Environmental Forces - Environmental factors always affect the business. Government policies on cutting the waste, minimizing the consumption of natural resources and avoiding harm to the animal really make it difficult sometimes.
- Legislative Forces - Government policies also sometimes create problems for companies like Tesco. As an example, FRC (Food Retailing Commission) passed a policy according to that forcing the suppliers for payments and asking the payments without earlier notice is forbidden which has created many problems for Tesco.
- Increased share in the market
- Insurance vertical of the company doing good
- World’s biggest online supermarket
- Perfect brand value
- Leader of the UK supermarket
- Reliable on the country market
- Not able to reduce the debts and thus not able to make new investment in the store
- Facing lots of competition in the market
- Also dealing in the non-food retail market
- New products like health and beauty
- Expanding to other countries and creating a customer base
- Change in the social or cultural environment of the country
- Bad performance in international market
- Asda, Sainsbury and Wall-Mart
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Porter’s Five Forces Analysis
- Threat of new Entrants - Initially there were fewer competitors in the retail market in UK. Around 75% of the retail market share was divided among Tesco, Asda, Safeway and Sainsbury, but in the current market there are many other new players who are challenging these four and making a name for themselves in the market.
- Bargaining Power of Suppliers - This is the plus point for Tesco as being a major store in the UK they are able to negotiate with suppliers and able to get the unmatched price from them which is not applicable to small stores as they are not in the condition of bargaining with the suppliers.
- Bargaining Power of Customers - Due to the increasing competition in the market, bargaining power of the customer is increased and since lots of options are available in the market, it might not be very good for companies like Tesco.
- Threat of Substitutes - There was a time when Tesco was the only major super market in UK, but increased number of small chains in the same business is causing a threat to Tesco.
- Bargaining Power of Competitors - Due to the changes in the market and other big players, Tesco has to spend a lot in getting the consumers’ attention and finding the innovative ways to get business.
P 3.3 Business and Cultural Environment
The current buyers in the market are moving towards the “one stop solution” trend which means a single store with all the products where customers could do the bulk shopping. Tesco has understood this social change and that is why they are working on increasing the types of products they are offering in their stores. Tesco is also concentrating on increasing the products other than the foods and beverages. There is also another factor that people are now moving towards the packaged food which they could use as their daily meal and avoid preparing the meal at home. To meet this challenge, Tesco has to provide the product which constitutes the whole meal and could be used daily (Moore, 2004, 81).
Another social and cultural factor is the increasing awareness of the people in health related issues and due to this people’s attitude towards the food they are buying and eating has been changed a lot. Nowadays people are more concerned about what they are eating. To meet this challenge, Tesco planted a new product in the market – Organic foods and this product has increased the revenues for Tesco drastically.
LO4 Be able to assess the significance of the global factors that shape national business activities
P 4.1 International Trade and Tesco PLC
Developing the business overseas is one of the major factors in the success of the Tesco PLC. Tesco is supermarket chain which was established in UK, but implementing the international trade in their business successfully is what made Tesco an International supermarket chain. They are operating in 13 countries and also started the trade in US market also. The main markets, Tesco is operating are European, Asia and Northern United States. Tesco was established in 1999 and their first overseas venture was established in 1995 when they started a store in Hungry. After that Tesco moved to Poland, Taiwan, South Korea and Ireland.
To concentrate in the International trade Tesco has been following a strategic business plan in which they analyse the every aspect of starting a new business in any country. In 2011 company made around half of its profits through international trade and increasing every year. In the late 2007 Tesco started the business with USA and opened their first store in California USA. The best thing about Tesco’s international trade is that they customized their products as per the social culture of the country or city where they start doing business. This is what gives them new customers and helps in the growth of the company. Although, Tesco has to face a lot of competition in the international trade with other major international stores and also with the local supermarkets, they are doing pretty well in the area because of their well-planned strategy (Havinga, 2012, pp. 879).
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P 4.2 Global Factors
Some of the policies of Tesco PLC used in the global trade and fighting the competition could be summarized as below:
- Adopting to the local Market: Cultural Taste - If you are in the business of food retailing, it becomes necessary that you adapt to the local market where you are trying to expand the business. Every country has its own cultural taste which is different from another country and Tesco is using its comparative strategy to identify these differences and launching the products which are according to the cultural taste of the people.
- Cultural shopping differences - There are different shopping styles people have in different countries. In some countries, people do bulk shopping once in a week and demand of packaged food is more in these countries, while in some places people need the fresh food for cooking and they shop almost daily. Tesco has to provide these options as per the shopping style of the locals (Coe & Lee, 2013, pp. 341).
- Different operating costs - Tesco has to focus on their operating costs in different countries. For example, buying the rice in Japan would be a good idea because they are one of the largest producers of the rice and same could be done in China employing the local labour as labour is cheap in China.
- Increased Inflation in countries - Due to the recession and some other reasons, inflation in the countries where Tesco has its presence is rising and it is becoming very difficult for Tesco to maintain the Prices low. This problem is going to hurt Tesco when they are dealing with local markets, because in this case they might be able to compete with Tesco due to decreasing buying power of the customers and providing them products on low price.
P 4.3 European Union Policies and Tesco
Tesco PLC has its presence in European Union and their 80% stores are located in the countries under European Union. This is the reason, the policies of EU affects the business of Tesco PLC very much and keeps check on the different mergers company does in different countries under EU. Since these mergers happen in EU countries, Tesco has to take care of the ECMR and 2 of the mergers done by Tesco have been reported to ECMR. Sometimes ECMR takes a lot of time in providing the decisions on these cases and due to this Tesco has to suffer losses.
The other issue which Tesco is dealing with European Union Emissions Trading System
(EU ETS) has also caused many problems due to the policies of EU ETS. European Union policies are forcing the companies to relocate because they are violating the terms of EU ETS. But Tesco has denied the order of relocating their store. According to Tesco, it’s not suitable for them to move the store, because their customers are not going to cross the channel to buy the products and relocating is going to be disastrous for them. Another argument from Tesco is that their store is not running any kind of machines which are going to pollute the environment and also they are not subjected to leakage then why should they move their store. But Tesco is making changes in some of their production houses as per the policies of EU ETS and going to use the smart energy sources to reduce the emissions (Wood, 2013, pp. 302).
But European Union is not happy with the steps taken by Tesco and accused them for using the harmful chemicals which are not as per the policies of the EU. European Environment Bureau EEB also accused Tesco for causing the harm to environment and not following the policies.