ORGANIZATIONAL PURPOSES OF BUSINESS
This report analyzes the business environment for Tesco Plc., a public company listed in the London Stock exchange. Tesco is the largest food seller in the United Kingdom, and the third largest in the world. The report discusses different types of organizations and their purpose, with a specific focus on Tesco Plc. Secondly, the report analyzes how the company`s strategies and responsibilities meets the objectives of these stakeholders. The report also analyzes the UK`s national environment in terms of competition, regulations, monetary and fiscal policies to determine how they affect Tesco`s performance. Moreover, market forces and how market structures affect output and pricing are matters that are also discussed.
1.1 The purposes of different types of organizations
Every business organization is created to achieve a particular purpose or purposes (Bevans, 2007, p. 18). The following section looks at each type of organization and their purpose:
(a) Private limited company– the purpose of this form of business organization is to raise capital by issuing shares that do not exceed 50 shareholders. Its other rationale is to control share ownership in a manner that makes it difficult for any of them to take over the company. There are numerous restrictions and rules that bind shareholders. For instance, they cannot publicly sell their shares to third parties (Bakhru, 2006, p. 56). A good example of a private limited company is Virgin Group Limited.
(b) Public limited company– the purpose of a publicly listed company is to raise sufficient capital through the capital market, and distribute its ownership among a large group of shareholders (Lawrence and Weber, 2008, p. 7). Tesco is an example of a public limited company.
(c) Sole proprietorship– these are businesses owned and managed by a single person (the sole proprietor). The purpose of this form of organization is to give the business owner complete freedom in managing the business and make the most of his/her capital. It allows business owners to utilize their knowledge in their own way and take on high risks, but with higher earnings. An example of this is a shop in an area where people live..
Tesco stakeholders can be defined as individuals or groups with an interest in the company. Tesco has different stakeholders, and each stakeholder has unique needs and expectations from the company (Broady-Preston and Steel, 2002, p. 387). Tesco`s major stakeholders include, stockholders, workers, customers, suppliers, and the government.
(a) Customers- Shoppers are the main reason why Tesco exists. Consequently, Tesco has to satisfy their objectives before those of the stakeholders. Tesco provides its customers a variety of goods and services at affordable prices. It has opened more branch locations for the ease of access by its customers. In addition, the company has a club card that rewards its loyal customers by allowing them to earn points every time they shop.
(b) Stockholders– these are the actual owners of the business. Stockholders require high returns on their investment in the business (Gitman and McDaniel, 2008, p.87). Tesco`s return to shareholders over the past 5 years has averaged 3.7% despite the global recession (Tesco PLC, 2014, p. 17). Similarly, the company`s average share price increased from 328.39p in 2013 to 349.48p as at February 2014 (Tesco PLC, 2014, p.111), an indication that the company has met the objectives of its shareholders to a large extent.
(c) Employees– as at 2014 February Tesco had 317,847 employees in the UK (Tesco PLC, 2014, p. 83). The workforce expects fair remuneration and chances of growth. In addition, they want free-information flow so that they can evaluate the prospect of growth, salary increases and retirement benefits (Gitman and McDaniel, 2008, p. 87). Some of the benefits the company currently offers to its employees include competitive salaries, shopping discount and attractive pension packages.
Responsibilities and strategies to customers-Tesco is expected to offer quality products and the best customer experience to its customers. To achieve this, Tesco makes use of a number of strategies. For example, the company operates an efficient customer relationship management policy that offers the best service to its consumers. This has in turn promoted customer loyalty and positively impacted in its bottom line.
Responsibilities and strategies to stockholders– The company has an obligation to avail sufficient information to investors and maximize shareholder return and share value (Burnes, 2004, p. 46). To achieve this, the company has website through which investors can get all the information they require. In addition, the company published its annual and quarterly financial statements for its stockholders and potential investors to allow informed decision making.
Responsibilities and strategies to employees– the company is responsible for providing a favorable work environment and development opportunities for its employees. To achieve this, the company implements efficient human resource management policies that meet the employees` objectives. Based on the customer service profit chain model, if the workers are satisfied, it will positively impact on the company`s performance and bottom line (French et al., 2005, p. 183).
Responsibilities and strategies to society– The society in all regions where Tesco operates expect the company to be socially responsible. Some of the responsibilities expected of Tesco are indicated in figure 1
Source: (Daniels et al., 2004, p. 78).
Economic systems are complex networks of individuals, organizations, and institutions and their legal and social relationships. There are three economic systems-command or planned economy, free enterprise and mixed economy. In the case of Britain, it is a mixed economy where resources are jointly owned by the government and the private sector. The government supplies merit and public goods and occasionally intervenes to rectify perceived market failure, for example, if Tesco pollutes the environment, then it is surcharged by the government. The government also intervenes by reducing taxes or subsidizing the cost of inputs, allowing Tesco to increase its output. Furthermore, government expenditures in infrastructure such as telecommunications and road network allows Tesco to reduce its transportation and communication costs, which translates into lower prices for UK consumers (House, 2004, p. 42). Similarly, favorable policies in the UK also allow Tesco to sell its products both in the UK and in other EU member countries, which expands the company`s market and profitability. Tesco also contributes to the economy o in terms of the U.K in terms of employment and GDP.
Source: Denison (1990, p. 31).
Government implements different fiscal as well as monetary policies depending on the state of the economy to positively influence economic activity. These policies include:
Changing the interest rate– this a monetary policy tool, if the interest rate increases, businesses such as Tesco incur high costs in borrowing capital. Customers also pay more on their loans, which reduces their disposable earnings and therefore the demand for goods and services that are produced by companies such as Tesco. If interest rates are low, Tesco will secure capital at a low price, leading to improved business activities.
Changing the reserve requirement– an increase in reserve requirement increases the interest rates, which attracts consumers to save rather than consume. As a result, companies like Tesco will record a decline in sales volume (Fender, 2012, p. 71).On the other hand, when the reserve requirement is reduced, individuals prefer to consume rather than save, and businesses such as Tesco record increased sales.
Tax rate changes-Increase in the rate of tax in business, negatively affects businesses. This may force them to reduce the volume or quality of products produced. On the other hand, a reduction in taxes companies such as Tesco may improve on the quality of their products without increasing product prices. Similarly, the tax savings can be used in marketing to boost sales.
The UK government has put in place policies to prevent companies such as Tesco from becoming a monopoly retailer. Firstly, the company cannot enter into agreements with other UK retailers such as Asda, Sainsbury’s, or Morrison’s either to fix the level of output or product prices. It means that Tesco cannot engage in any activity that seeks to increase its profits to the detriment of consumers. Secondly, under the competition policy, Tesco is barred from misusing its market power as the leading retailer in the UK market to sell its products below the production costs with the objective of forcing competitors out of business. Similarly, it cannot use its prevailing position to charge higher prices. Furthermore, under the competition policy, the company is barred from using its dominance to pay lower prices for its suppliers. Finally, Tesco cannot merge with other retailers, if doing so is not in the public interest.
There are four main types of market structures as indicated the table below:
Source: (Dolan, 2004, p. 32).
From the above table, Tesco operates in the oligopoly market because there industry only has five large retailers that include Tesco, Morrison’s, Sainsbury, Safeway and Asda, with Tesco being the market leader. However, a company such as Tesco that operates in an oligopoly does not have absolute freedom in fixing its prices. This is because given the few big competitors in the industry; doing so is likely to be noticed and may be treated as a violation of the competition policy. As a result, in setting its prices, Tesco must consider the prices charged by the other competitors and the quality of its products. However, Tesco is free to choose the volume of stock in its stores based on the demand in the market.
The main market forces include demand and supply, demand elasticity, supply elasticity, economies of scale, consumers` actions and perceptions and output decisions (Dolan, 2004, p. 61).
(a) Demand and supply– Tesco has to decide on the volume of output it stocks in its stores based on the market demand (Denison, 1990, p. 78). When demand is high, so should be the supply, and when the demand is low, Tesco should reduce its supply to avoid losses, especially for perishables.
(b) Consumers` actions and perceptions- Tesco takes into account the perceptions of its customer base and what they consider before making purchase decisions. For example, for price sensitive customers who prefer quality products, the company can find methods of producing quality goods without necessarily increasing product prices (Dolan, 2004, p. 61).
(c) Scale economies– before producing a product on a large scale, an organization first considers if economies of large scale of production exist. Tesco enjoys economies of scale and as a result, can produce more output at a reduced cost, particularly when the demand is high.
A company must evaluate the cultural and business environment prior to making any decisions because these factors have far reaching implications on a business (Slack, et al., 2000, p. 11). The UK business environment can be analyzed using PEST analysis. The political environment in the UK is largely stable, and the government supports businesses through different legislations. Tesco can make its business decisions taking into account the stable political environment. In terms of economic factors, there are several variables that growth. In 2015, the UK economy is expected to grow by 2.4%, and the other economic variables are in a good position, and Tesco can benefit from this. In terms of social factors, Tesco`s business is influenced by buyer perceptions, behavior, and expectations, which Tesco must take into account. Finally, technological factors are important. With the many technological changes happening, Tesco must realign its operational activities to suit the technological landscape. This will ensure that the business reduces product costs and increases quality. Other than the business setting, the company must also consider cultural factors in the UK. Culture has also affects consumer behavior. Tesco designs its marketing policies by considering the UK`s culture.
Given the developments in modern techniques of production, international companies such as Tesco have benefited significantly in terms of reduced or no trade barriers and better transport systems. For Tesco, international trade is very essential Tesco already operates in numerous EU counties, and the company enjoys trading without any barriers. Without international trade, Tesco`s scale economies will be of little use and the company cannot make significant revenues. Similarly, due to international trade, Tesco has managed to outsource some of its operations to other low cost markets. Consequently, businesses have more to benefit from international trade (Galloway, et al., 2000, p. 34).
Global factors significantly influence business operations for both domestic and international companies (Burnes, 2009, p. 49). There are various global factors. Firstly, there is the issue of international competitiveness. For a company like Tesco, it has to take into account the existence of other multinational competitors such as Wall-Mart. Where competition is stiff, it becomes very difficult to penetrate the international markets. The second aspect relates to global business environment. There are various political, social, economic, and legal factors that openly affect business organizations. Tesco must take into account these factors in its international markets. Other factors include taxes, tariffs, and exchange rates. If taxes and tariffs are high in the international markets, Tesco will have difficulties in competing with domestic companies. In the EU, Tesco benefits from uniform tariffs and taxes across all member states. In addition, exchange rate fluctuations poses risks to Tesco`s revenues given that it operates in regions outside the EU.
The EU has passed various rules and regulations that companies in all member states must comply with when conducting business in the EU region (Burnes, 2009, p. 45). The main policies cover the following areas: employment policy; inflation policy; regional policy; taxation; education and training; international policy, and establishing the ‘rules of the game’ policy. These policies directly affect business operations in all member states. Tesco must evaluate all policies to see if there is any policy that can limit is business operations. Otherwise, the company risks being penalized for violating EU laws. As a company that operates in various EU countries, Tesco must comply to benefit from the opportunities created by the European Union (Madura, 2007, p. 551).
From the analysis of the different issues, it is clear that companies must consider carefully the various internal and external factors in their operating environment because these factors influence their business activities both directly and indirectly. Tesco has successfully tacked these forces, and this has contributed to its success.
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