Business Analysis (Essay Sample)

Speech Act
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Tesco’s Crisis
Tesco PLC is a leader in the general merchandise and grocery with its headquarter in Hertfordshire in England. It has operations in their continents including, Europe, Asia and North America and spread across 12 countries. It was established in 1929 and has since diversified to various regions in Europe, America, and Asia. The organization is on the London Stock Exchange. As at 2014, the company market capitalization was about £20.5 billion and was 28th largest in all the primary listed businesses in London stock Exchange. Of late, Tesco has been involved in a series of crises with the most recent being the accounting fiasco coupled with a downfall trend in profit and market share.
On September 22, 2014, Tesco confessed to an accounting error that had resulted in an overstatement of the profit for the first half of the financial year. The organization had reported a profit of £1.1 billion but the actual profit was supposed to be £850. Upon this disclosure, share prices have gone down by about 15%. This has led the lending institutions to be on the watch out for a possible review of the credit ratings. In a detailed article dated Sep 27th, 2014, there are questions asked about the nature of the error and whether it could have been deliberate. The suppliers pay rebates for strategic positioning of their products and as well marketing campaigns. The management overstated the forecasted revenue and as well understated the cost of expired and missing stock (The Economist, n.d.).
Several studies that have been filed on fraud suggests that 60% of the cases are tied to the accuracy of the revenue recognition. One of the major technique is the timing difference. It involves an organization booking revenue in the wrong period to manipulate the books revenue and stay consistent. In such situations, revenue for the current quarter is reserved in the subsequent quarters or vice versa. Another technique that is is fake sales. The party book sales that are not existent and then reverting them to the beginning of the next financial year (COSO, 2010). Revenue recognition in most organizations is a matter of judgment. The practice is complex especially in long term contracts or in situations where the sale is tied to the service agreements. There has been a series of discussion between Europe and America on the revenue recognition common practice for over a decade.
In the case of Tesco, there are complex promotional contracts with the suppliers. The complexity of the agreement may pave a way for honest mistakes and as well manipulation. In the recent past, there has been amplified warnings from the auditors of the biggest retail firms. This has followed because there has been an increase in the balance sheet valuation of the rebates. Investigations are underway to underpin the causes of the error and whether it was deliberate or not.
Tesco problems are far more than the accounting error. Philip Clarke who was removed from office in July to pave the way for the investigations. His predecessor Terry Leahy is criticized for the downward trend that the organization has taken. In spite the fact that he widened the lead of the supermarket to its rivals, the profits measured by the return on capital decreased by a third between 1998 to the year 2010. The arrival of Mr. Clarke saw some improvements in the cost cutting especially on the upgrade costs, however, the prices went up under his watch thus driving away the customers.
The other threat that is facing the organization is the competition from other grocery stores that sell the same quality but at a lower cost. The most dominant competitor is the German trial Lidl and a dual called Aldi which has a Northern and a Southern branch. Research has estimated that the sales of discount grocery will increase at a rate of about 4.7% until the year 2017. This growth in contrast to the supermarket sales which is growing at a slower rate of 3.1%. Though the difference may seem marginal, the implication is that by 2017, these discount groceries stores will have about a fifth of the market share by the year 2017. For instance, in the period, 12 weeks to September in contrast to the same period last year, the business grew by 17.7% and 29.1% for Lidl and Aldi respectively. At the same period, the sales in Tesco chains in Britain dropped by 4.5%. It is, therefore, possible to deduce that there is a motive for the revenue forgery as the chain try to hides the profit sacrifices that they are making to caution the declining sales.
For Tesco to remain competitive, there is the need for a well-orchestrated action points that needs to be. An accounting error which is a revenue fraud is a public relation disaster to the organization. This will affect both the investors and as well the customers. There is, therefore, a need to come up with a mechanism that will avert the damages already caused. A public relation campaign and advertisements to remind the customers why the chain is a premier shopping destination (The Economist, 2014).
The other issue that they need to cope with is the competition in terms of prices. Th...