Stuck in the middle of a shifting landscape

The Millennium Bridge, a 320-meter-long suspension bridge connecting London’s financial district to Bankside, south of the River Thames, opened in June 2000. Thousands of pedestrians streamed over it.  At first, the bridge was still. Then it began to sway, just slightly. Then, almost from one moment to the next, the wobble intensified. Suddenly people were walking like tentative ice skaters: planting their feet wide, pushing out to the side with each step. Left, right, left, right, in near-perfect unison. The synchrony was utterly unintentional, but it was those unchoreographed footfalls that were responsible for turning a $32 million design triumph into a very embarrassing engineering quandary. The bridge was closed almost immediately.

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There is an analogy between the unexpected, but dramatic effects on the Millennium Bridge caused by people acting in unison (even if unintentionally), and market places in general. A market that has appeared solid and reliable can suddenly become an unstable environment as external factors cause the foundations of the market to wobble. Markets are dynamic, and even dominant firms cannot afford to ignore the effects of apparently minor shifts in a market’s structure. The retail market, in particular, is subject to the vagaries of fluctuating external factors and changes in the individual circumstances and preferences of consumers. Seemingly gentle change can unexpectedly accelerate until a tipping point is reached when consumers begin acting in unison; at which time the environment ceases to be controllable and firms can only react to the effects of the changes and the shifting ground under their feet.

Price wars and the lack of wage growth finally caught up with Britain’s retailers in 2014 as official figures released by the UK’ s Office for National Statistics in July, recorded a 1.3% fall in spending in food stores; the first decline in 25 years. Tesco the UK’s largest retailer, operates 3,378 stores in the UK and 6,784 Worldwide. However, its revenues and market share have declined significantly since the recession, with consumers tightening their purses and look for greater value for money. In August, its market share fell to 28.2% compared to 30.2% a year previously and its shares reached an 11-year low after it cut its full-year profit forecast to £2.4bn from £2.8bn.

Tesco had begun life as the shop that ‘piled it high’ and ‘sold it cheap’, but over the last decade has aimed to be ‘all things to all people’ – catering to all incomes and tastes through innovative branding, professional marketing and careful product selection. However, the impact of the recession and more savvy consumers has seen its market dominance attacked from many directions. There is a revolution in the grocery business, but Tesco has taken too long to wake up to that fact – its market leadership created both complacency and arrogance. As a result, Tesco has become ‘stuck-in-the-middle’ between the more competitively priced discounters, such as the German retailers Aldi and Lidl, and the more high-end grocers, such as Waitrose, All three chains have seen rising sales and modest increases in market share, much of this at the expense of Tesco, whose brand image has become increasingly muddled in the eyes of consumers as it attempts to defend its position at both the bottom and top ends of the market.

Shoppers are moving away from the Tesco’s vast out-of-town stores in droves, as they find better prices and easier ways to shop – the high street and on their sofa with an iPad. Aldi and Lidl offer an uncomplicated affordable price proposition to customers and run their business with very low overheads. Their shops are far smaller than the hypermarkets of Tesco, and they stock considerably fewer product lines. On average, a Lidl or Aldi store will stock 1600 product lines (mainly own brand), compared to the 40,000 offered by a large Tesco operation. Consequently, the administration costs of Aldi and Lidl are far lower than Tesco, allowing them to pass on much cheaper prices to their customers.

Stuck in the middle

Michael Porter recommends that firms focus on one of four generic strategies:

1. Target a broad market with a differentiated product
2. Target a narrow/niche market with a differentiated product
3. Target a broad market with a low cost product
4. Target a narrow/niche market with a low cost product

The place a firm does not want to be is ‘stuck-in-the-middle’, with an undifferentiated product that’s not low cost. Firms that get stuck in the middle typically lose market share to low cost competitors from below and to high end, differentiated competitors from above. The goal in adopting just one of the four generic strategies is to create, over time, a set of complementary activities with great fit and clear trade-offs, which competitors are unwilling or unable to match.

Porter advises firms to find what they are good at and stick to it;  in other words to focus on their core competencies. He wrote:

The firm stuck in the middle is almost guaranteed low profitability. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business away from low-cost firms. Yet it also loses high-margin businesses – the cream – to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation system. (Competitive Strategy, p. 41-42)

Porter believes that by focusing on one strategy, instead of many, a firm can raise entry barriers to new competition. Indeed, research studies consistently indicate that firms adopting one of the strategies, namely cost‐leadership or differentiation, perform better than ‘stuck‐in‐the‐middle’ firms, which do not have a dominant strategic orientation.

Possible strategic responses from Tesco

Tesco is simplifying its marketing structure under three teams in a move that will result in some redundancies at senior level as it looks to increase its focus on the customer. In addition, it will need to address its muddied corporate image and its brand identitiy by concentrating on its core competencies and making its customers aware of what it stands for in the post-recession retail market. To regain this clarity, it is anticipated that it will be forced to sell off parts of its international and non-core business. Analysts are speculating that Tesco will hive off its Asian division as a separate business, quoted in Hong Kong. However, it is in the UK where Tesco’s priorities lie. Consequently, they are expected to cut their product range, making the buying experience less complicated for those shoppers simply looking for low prices and better value for money.

Even though economic growth in the UK is picking up, it is uncertain the extent to which Tesco can re-emerge from the perils of the middle-market as the same force it has been for much of the last decade.

Practical activities

1. Research the following UK supermarkets in terms of market share, brand image, growth, strategy and pricing:

• Sainsbury’s
• Asda
• Morrison
• Waitrose
• Aldi
• Lidl
• Tesco

2. Place these supermarkets on a position map, using price and perceived quality as the two axes.

3. Using Porter Generic strategies, assign each supermarket to one or more of the following strategic approaches:

• Cost leadership
• Differentiation
• Cost focus
• Differentiation focus
• Broad scope
• Narrow scope

4. Suggest, and evaluate, two different strategies Tesco can apply to prevent them remaining ‘stuck-in-the’middle’.

 

 Further development

You may consider using Tesco, or a similar organisation under threat of becoming stuck-in-the-middle, as the focus for an internal assessment or extended essay in Business Management.

Examples of other organisations stuck in the middle:

Of those ‘stuck-in-the-middle’ in the table above:

• American Airlines filed for bankruptcy
• Chrysler and GM required a government bailout in 2009
• Piaggio acquired its way into the differentiated end of the market by buying Aprilia
• Dr. Pepper was acquired by Cadbury Schweppes

As these examples seem to suggest, the middle is not a place to become stuck.

 

IB style questions

1. Create a SWOT analysis for Tesco supermarket
2. Explain the impact of the recession on Tesco
3. Analyse how major change in the external environment are affecting Tesco’s strategic decision-making
4. Evaluate two strategies open to Tesco to prevent it remaining ‘stuck-in-the-middle’

 

Sources:

Science Daily

Darden School of Business