Founded in 1919, Tesco has been a business success story. With its core business focus- ing on food retail, in just under a century, Tesco has grown from a market-stall in the East End of London into the largest supermarket in the United Kingdom, and the third largest globally. In 2012–13, Tesco boasted group sales of £72.4 billion, with £2 billion profit before tax. At the end 2014, Dave Lewis, who had been Tesco's CEO for only three weeks till then, sent an email to the company's staff members saying that the organization's cul- ture had to change. He said that Tesco needed to focus on its customers and work hard on being open, honest, and transparent. Most people in his position would have prob- ably waited more than three weeks before recommending such sweeping changes, es- pecially for something as significant as the organizational culture. So what caused Mr. Lewis to make such a dramatic public announcement? Put simply, a financial scandal. With significant issues, related to the drive for growth and positive market results, be- ing brought to light by a whistle-blower, at the end of September 2014, Tesco had to make an embarrassing announcement-they had overstated their mid-year profits by £250 million, later revising this to £263 million. The issues faced were twofold. In order to improve its own financial position, Tesco delayed its payments to some of its suppliers and it had also been including payments from suppliers as profit. It appeared that these payments were made against suppliers getting more favorable positioning for their products and more shelf space. Tesco's announcement resulted in an 8 percent fall in the share price, wiping £1.5 billion off the company's market value. A total of £3 billion was wiped off the share price in the three weeks following the announcement. On top of this, both the Grocery Code Adjudicator (an independent body set up to oversee the relationship between suppliers and supermarkets) and the Serious Fraud Office (SFO), the section of U.K. law enforcement focusing on serious or complex fraud and corruption, announced that they would be carrying out an investigation into the matter. When you look at company documents from this period, this type of activity would seem out of step with the culture of the organization. In 2013, the then-CEO, Philip Clarke, stated that the company should do all it could to earn stakeholder loy- alty and trust. In fact, the 2013 annual report identified poor relations with suppliers as a reputational risk and reaffirmed the company's aim to comply with the Groceries Supply Code of Practice. However, the satisfaction of customers and other stakehold- ers was replaced by a drive to meet financial targets and maintain share value. In January 2016, Christine Tacon, the Grocery Code Adjudicator, released her re- port. It didn't make for a pleasant reading for Tesco management. She found evidence of internal emails that suggested staff members should not make payments to suppliers before a certain date, in order to temporarily improve margins and ensure that the com- pany was not seen to be underperforming against targets. A list explaining how the staff could help Tesco reach mid-year targets was uncovered, which included an instruction not to pay money owed. Some payments were delayed by nearly two years and in some cases the supplier simply gave up asking! Following the overstatement in 2014, 125 institutional funds filed a joint lawsuit for £100 million, and Tesco is still under investigation by the SFO. It may be some time before a new culture of trust and transparency will be allowed to flourish; however, Tesco seems to have seen the error of its ways. The company has improved its com- munication channels with suppliers, a majority of whom now say they have a more positive relationship with Tesco than they did previously.2

Founded in 1919, Tesco has been a business success story. With its core business focus- ing on food retail, in just under a century, Tesco has grown from a market-stall in the East End of London into the largest supermarket in the United Kingdom, and the third largest globally. In 2012–13, Tesco boasted group sales of £72.4 billion, with £2 billion profit before tax. At the end 2014, Dave Lewis, who had been Tesco's CEO for only three weeks till then, sent an email to the company's staff members saying that the organization's cul- ture had to change. He said that Tesco needed to focus on its customers and work hard on being open, honest, and transparent. Most people in his position would have prob- ably waited more than three weeks before recommending such sweeping changes, es- pecially for something as significant as the organizational culture. So what caused Mr. Lewis to make such a dramatic public announcement? Put simply, a financial scandal. With significant issues, related to the drive for growth and positive market results, be- ing brought to light by a whistle-blower, at the end of September 2014, Tesco had to make an embarrassing announcement-they had overstated their mid-year profits by £250 million, later revising this to £263 million. The issues faced were twofold. In order to improve its own financial position, Tesco delayed its payments to some of its suppliers and it had also been including payments from suppliers as profit. It appeared that these payments were made against suppliers getting more favorable positioning for their products and more shelf space. Tesco's announcement resulted in an 8 percent fall in the share price, wiping £1.5 billion off the company's market value. A total of £3 billion was wiped off the share price in the three weeks following the announcement. On top of this, both the Grocery Code Adjudicator (an independent body set up to oversee the relationship between suppliers and supermarkets) and the Serious Fraud Office (SFO), the section of U.K. law enforcement focusing on serious or complex fraud and corruption, announced that they would be carrying out an investigation into the matter. When you look at company documents from this period, this type of activity would seem out of step with the culture of the organization. In 2013, the then-CEO, Philip Clarke, stated that the company should do all it could to earn stakeholder loy- alty and trust. In fact, the 2013 annual report identified poor relations with suppliers as a reputational risk and reaffirmed the company's aim to comply with the Groceries Supply Code of Practice. However, the satisfaction of customers and other stakehold- ers was replaced by a drive to meet financial targets and maintain share value. In January 2016, Christine Tacon, the Grocery Code Adjudicator, released her re- port. It didn't make for a pleasant reading for Tesco management. She found evidence of internal emails that suggested staff members should not make payments to suppliers before a certain date, in order to temporarily improve margins and ensure that the com- pany was not seen to be underperforming against targets. A list explaining how the staff could help Tesco reach mid-year targets was uncovered, which included an instruction not to pay money owed. Some payments were delayed by nearly two years and in some cases the supplier simply gave up asking! Following the overstatement in 2014, 125 institutional funds filed a joint lawsuit for £100 million, and Tesco is still under investigation by the SFO. It may be some time before a new culture of trust and transparency will be allowed to flourish; however, Tesco seems to have seen the error of its ways. The company has improved its com- munication channels with suppliers, a majority of whom now say they have a more positive relationship with Tesco than they did previously.2

Principles of Management

OER 2019th Edition

ISBN:9780998625768

Author:OpenStax

Publisher:OpenStax

Chapter8: Strategic Analysis: Understanding A Firm’s Competitive Environment

Section: Chapter Questions

Problem 2CTQ: How has Teslas strategic position changed since it was founded in 2003?

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