Sir Terry Leahy, chief executive of the phenomenally successful supermarket giant Tesco, shares some of the secrets of the company's success and offers some advice on competing in world markets.
If you go into any street market this weekend, you will see a scene that has not changed in centuries: stall holders crying their wares, trying to catch your eye, competing with each other.
That is how Tesco started out, and today it has become one of the UK's biggest businesses. It has gone from competing in the East End of London to competing on a world stage. So how has it done it? And how does it continue to compete in the world market today?
Tesco are relative new boys in terms of competing in world markets. Ten years ago, the company did not have any business overseas, nothing. Not only was the company not competing on the international stage, but at the beginning of the 1990s, it wasn't even competing that well on the national stage. Tesco was number three in the UK, and its competitors were making the running. Today, it is number three in the world, having become number one in the UK along the way. The company is in 13 countries, it is the market leader in six of them, and it now has more space outside the UK than within it.
Tesco does not just sell food anymore. It is now competing keenly on clothes, pharmacy, electrical goods, books, music, telephony, financial and legal services, and of course online as well. This year, these new businesses, created since 1997, together made more profit than the entire group did in 1997.
How has Tesco done it? I could tell you about its fantastic staff and managers, or the way that it has used technology to improve supply chain and distribution nationally and internationally, or about the patience and commitment of its investors, or the importance of a stable economy here in the UK. All of these factors are important, and Tesco could not have achieved what it has without them.
However, if I think about what has really made the difference to Tesco's ability to compete internationally, these would be my top four. It has:
- Been clear about what it wants to achieve
- Listened to what its customers have told it
- Given responsibility to its managers and staff
- Tried to keep things simple
These are the principles that have worked for Tesco, but I think they could work for other businesses. They apply to a business of any size. The bigger it gets, the more international its business, the more important these factors are. If a business follows these principles, I believe it can make a small business big. If it ignores them, it might find itself making a big business small.
THE QUEST FOR CLARITY
Let me say a bit more about each of these principles, first being clear about what you want to achieve. Businesses need to be able to move fast, ideally as fast as customers themselves change, which is very fast indeed in my experience. They also need a compass bearing, they need a centre of gravity. As the compass spins, they need to know where they can find true north, a point of reference that they can always come home to in any situation.
Shortly after I took over at Tesco, we sat down with thousands of our staff and asked ourselves some simple questions: what was the business for, what did we believe in and where did we want to go as a company? Asking them was the easy bit; answering them, of course, was a bit harder. But, this is what we came up with:
- Core purpose: to create benefit for customers and to earn their lifetime loyalty
- Values: to make sure no-one tries harder for customers and to treat people how you would like to be treated
- Strategy: to build a strong core business here in the UK; to become as strong in non-food as in food; to develop a profitable retailing services business; and to be as strong internationally as domestically
Eight years on, there have been huge changes at Tesco, but its core purpose, its values and its strategy have not changed at all. By first making sure what it was clear about, what it wanted to achieve, Tesco has given itself a much better chance of achieving its goals.
It is no good having a fantastic strategy if you do not have any customers, and that brings me to my second point: the importance of listening to customers. I know that Tesco has a reputation for being obsessed with customers, and it is a reputation it has worked hard to earn. Whatever I am doing, wherever I am, I always spend a couple of weeks at least out in the stores talking to customers and staff. I am just listening, getting ideas, finding out what is working, what is not working and learning how we might put it right. And it is not just me; it is a habit that everyone in the business has.
Once a year, all Tesco directors and a thousand of its managers spend a week working back in one of its stores, stacking shelves, working on the tills, serving customers, reminding themselves of what they all do for a living. Tesco does not want managers like First World War generals, sitting in some shelter far from the action. We want them in the front line, on the ground, with the troops, experiencing life at the sharp end.
Tesco is constantly checking what its customers say, and what they do. Every year, for example, Tesco interviews tens of thousands of them directly. In any one week, the company gets more than 120,000 contacts at its customer service centre through phone calls, emails, letters, things like that, and all these things give it very useful feedback. Tesco also has its Club Card, which has been a terrific way of understanding how customers behave and the things they want.
Why does Tesco do all this? It's because all the innovations that have powered the company's success have come from listening to its customers and watching how their lives are changing. The Club Card, Express stores and Tesco.com have all been ideas that have come directly from Tesco customers and the way they live their lives. So my second piece of advice is: trust what your customers tell you and follow them where they lead you. If you do, you will not go far wrong.
A QUESTION OF TRUST
If you follow that advice and grow, success of course brings new challenges, but the bigger you grow, the further you spread, the harder it can be to hold on to that spirit of enterprise. How do you keep a small business mentality within a big business body?
At Tesco, the challenge was how to run a business that caters for customers, not just in Bradford, but also in Budapest and Bangkok. How do you deliver a consistent quality of service, employing 350,000 staff in over 2,000 stores with such a rich cocktail of languages, cultures and religions.
Let me tell you how Tesco hasn't done it. It has not done it by trying to control everything from the centre. It has not done it with endless rules and targets and blueprints and directives, and it has not done it by setting up committees and bureaucracy. Tesco has done it by trying to remain true to the spirit of the market stall.
Unnecessary rules and regulations, whether they are drawn up by tidy-minded managers or imposed from outside by politicians or bureaucrats, are the enemies of enterprise. They get in the way of the signals that should flow directly from customers to managers on the ground, and back again. They encourage back covering and buck passing. They kill responsibility and initiative.
Just imagine what would happen in Tesco stores in China if they had to ask me for permission to stock a line. While some committee was deliberating, Tesco's competitors would have gone ahead anyway and scooped up all the business.
As Tesco moves into new markets, it has not tried to impose one Anglo-Saxon world-view from the top. Quite the opposite. The company may have gone global, but it has been determined to stay local. To do that, above all, you need good local leaders. That means you have to trust people on the ground. Yes, Tesco has been careful to choose excellent managers and staff. Yes, it has helped to train them, and helped them to learn. At any one time, one in ten of Tesco staff are training to move up to the next level in the business. The company promotes from within, and it has provided its entire staff with a clear framework of values. Above all, it has been down to that very simple but powerful word: trust.
All business should try to keep things simple. It speeds things up, it makes it easier for employees to know what is expected of them and it saves money. Of course, the bigger you grow, the more important that is. Think how many billions of actions Tesco's 350,000 staff have to carry out every year. Think how much time and money you can save around the world if you can simplify your basic processes. It is one of the reasons why Tesco works with those processes as leaders in the business, so that it really understand the nuts and bolts of how they work, and how they could be improved.
Let me give you an example. Many of the fastest-moving goods now arrive at our stores on ready-stacked, moveable shelves. These shelves are moved straight into position in the aisles, so there is far less unloading and stacking than there would normally be. It saves time, and it means the shelves are kept filled. That means that there is a lot more for the customers to buy and, of course, a bigger opportunity for suppliers to sell more of their goods. It is a simple idea, and one from which everybody benefits.
Let me give you two other quick examples of how Tesco tries to keep things simple. First, Tesco is a very flat organisation. There are no great hierarchies or job titles to complicate things and to keep people in their place. It is a nice simple structure that is designed to be open and to encourage talent to rise to the top.
Secondly, Tesco has a very simple management tool that helps keep it on track. If you went backstage in any Tesco store, you would find a big wheel-shaped chart on the wall. It is broken down into a number of performance measures which is monitored and reviewed regularly. It is a simple system, so that every time they go in staff can see at a glance how they and the store are doing, their particular contribution and the difference it is making.
THE IMPORTANCE OF STABILITY
If UK companies are to compete in world markets, they need economic stability. The economy relies on a confident consumer. Business needs to know that it can plan ahead with a degree of certainty. It wants low inflation, steady interest rates and good labour laws. It has had that stability for the last ten years or more, but it is something that can never be taken for granted.
Another battle that business has to keep up is the battle against too much regulation. The Institute of Directors' business manifesto is very clear about the damage that the wrong sort of regulation can do, and it also has some interesting ideas as to how that burden could be cut.
The other business burden of course is the tax burden. It is not a state secret to say that business would be very unhappy to see taxes going up. There is a very simple reason for this. If UK companies are to compete in world markets, they need a strong home base. They need profits so that they can invest, employ people and expand.
I am optimistic about the future, however, because I believe the same dynamic of competition – global competition – that drives companies such as Tesco forward also applies to governments. Just as we all face competition on price and service, so governments will increasingly have to be competitive on tax and regulation. They cannot hide from the global marketplace any more than we can.
Competition has been great for Tesco. It has made it better at its job, it has spurred it on in new directions. It will keep driving it forward and keep it up to the mark. I believe that it will also help make sure that within Tesco's big body there will always be a small business heart beating strongly.
Adapted from a presentation made at the 2005 Institute of Directors Conference