While Porter emphasised strategy development based on industry analysis, it is now becoming clear that an analysis of the individual organisation needs to be included. Including financial analysis can be of particular importance. This is supported by a study published by Rumelt where it is suggested that profitability at company level was superior to that of corporate or industry level. Generic strategies enable firms to identify the need for differentiation. However, the real issue is to differentiate a product so that it is attractive to the customer.
According to Lynch, Porter’s framework is static and cannot capture constant changes in the market. Another serious flaw of the model is the assumption that an organisation’s interests come first. In particular it equates buyers with all the other aspects of the micro-environment. Many strategists would argue that customers are the most important aspect of the micro-environment. Geographically, most people have a choice between different supermarket chains, therefore customer loyalty is seen as one of the major challenges for grocery retailers. In this case, industry analysis is not very helpful and it is necessary to consider the core competencies as outlined by Prahalad and Hamel.

Limits of Porter’s concepts include the lack of discussion of broader international context. They also ignore the human resource aspects of strategy, for example cultural factors or management skills. Without a financial analysis of a firm’s performance, these concepts only serve as a starting point in strategic analysis and should by no means be seen as complete solutions.

New Economy

Companies have to adapt to a considerable and fast-paced change in the market. Rifkin argues that many products are being transformed from goods into services. This so called new economy is turning everything upside down, when buildings used to be assets, now they are seen as liabilities. Lynch argues that strategy links the activities of the organisation to the environment in which it operates. This environment is constantly changing due to increases in wealth, international competition and technological changes. Markets have become more complex in economic, cultural and social aspects. Firms have also started to participate in cross-industry operations making Porter’s concepts increasingly out of date. For example, Tesco does not only compete with other grocery retailers, it also competes with firms selling electricals, toys and clothes, and also offers insurance and financial services. Physical assets are becoming increasingly marginal to the economic process. Instead, concepts and ideas are the ones carrying the real value in the new economy. Shortening life cycles, customised production and developments in technology require continuous innovations.

Evans et al. (p71-73) argue that in the era of information revolution the structure of industries has an impact on ways that companies compete. Information is increasingly seen as a basis of competitive advantage. This also has an impact on the five forces analysis. Barriers to entry can be diminished by new businesses choosing to operate through the internet. The change in economics of information can undermine established value chains in many sectors of the economy. This in turn may require a fundamental change in a company’s strategy.
Four pillars and profitability in the UK

As the food market in the UK is becoming saturated and planning restrictions are being imposed, supermarket chains have to look for other ways of making profit. The key to sustaining growth in a seemingly mature market is multiple sources: ‘every little helps’. Tesco’s long-term strategy is based on four key pillars: growth in the UK core, international expansion, increase in strength of the non-food sector to match that of the food sector, and development of retailing services.2

Tesco’s profit margins and turnover in the UK have steadily been increasing since 2000. Table X shows that both sales and profit of Tesco’s operations in the UK contribute by circa 80%. This could be attributed to continuous innovations of existing products and services. Although profit margin and return on capital employed of Morrison’s has been higher than that of Tesco between 2000 and 2003, their recent acqusition of Safeway has put them in a more unfavourable position.

When compared to the industry, Tesco’s profits and turnover have been greater than any of its rivals. This could partly be connected to its market share of 20%. Its closest rivals are ASDA with 11.2% and Sainsbury with 10.6%

Good stock turnover and increased days payable are an indicator of an efficient use of working capital. There has been a steady increase in value added in absolute terms as well as percentage of sales.

Tesco’s strategy and corresponding results

Although Tesco Clubcard was launched in 1995, improvements in technology over the past 10 years have led to improved data collection. It gathers fundamental information such as customers’ lifestage, shopping habits, what they buy, their response to promotions etc.
Based on this information, Tesco is able to exercise ‘reverse strategy’. In this way Tesco can deliver products their customers want rather than trying to find customers for their products. Improved stock taking, shelf stacking and managing of the supply chain can be attributed to a new real-time retail infrastructure. This was adopted in 2001 and later improved in 2003, adding to an ongoing profit. While Tesco is expanding in the number and size of its stores, it is important to be able to exercise and improve control. Accelerating the supply chain and reducing the number of ‘out of stock’ items is thought to lead to improved customer loyalty. This together with minimising of IT management costs and the ability to take a quicker corrective action should a problem occur lead to increase in profits.