BUSS4 - Want Good Analysis? Think How & Why?

How & Why. These are the two important words for students preparing for BUSS4 and as they practice their essay technique.So, why is that? And how can they be used?The source of their importance lies in the skill of analysis…

The challenge for students is to demonstrate to the examiner that they can respond to each chosen question with a logically-argued essay. A logical answer is one in which the argument is developed through relevant points, properly explained and supported by evidence. The use of How and Why is a great way to help "properly explain" a point and make it easier to reach Good Analysis.

In our BUSS4 exam coaching days we practice the tutor2u Stepping-Stones method for developing a logical chain of argument. By thinking about How & Why, the Stepping Stones method becomes much easier!

Let's look at an example of this in action by considering the recent decision by Tesco to withdraw from the US grocery retailing market.

Tesco's decision is a good example of retrenchment. It has decided to cut its losses in the US in order to focus the business on better investment opportunities. The result for Tesco shareholders is a £1.2bn loss on the US project.

It's a great example to use in a BUSS4 essay if it helps support a point that is relevant to the question. However, on its own, the information above is not really enough. You need to explain to the examiner why a strategy of retrenchment might be a suitable choice and how the case of Tesco helps support this argument.

So, let's take this step by step and see if we can develop some logical analysis using How & Why as our prompts?

WHY might a firm decide to adopt a strategy of retrenchment?

Retrenchment is about reducing the scale or scope of a firm's operations - for example by closing a business unit, implementing significant cost reductions or scaling back investment plans. Often a strategy of retrenchment is forced on a firm do to poor financial performance. It can also be adopted where a firm wants to make a change in strategic direction.

WHY did Tesco originally decide to enter the US market?

Tesco has pursued a strategy of international expansion in many territories - and with great success. Fresh & Easy launched to great fanfare in November 2007 – just before the recession and sub-prime mortgage crisis swept through the US causing American customers to retreat to the security of familiar retail brands.

WHY did Tesco decide to review its investment in the US?

Because their US Chain (Fresh & Easy) continued to incur heavy losses despite sustained efforts to improve the grocery retailing format. Tesco had tried to make a success of the business for over 5 years.

WHY was Fresh & Easy incurring heavy losses?

Because it did not have sufficient economies of scale to enable the business to be competitive and revenues were not enough to cover substantial fixed costs. The business was also criticised for its retail format.

HOW can a successful retailer like Tesco get it wrong in the US?

Industry experts have also criticised Fresh & Easy's use of self-service check-out stands which confused consumers used to heavy store helper presence. The chain's lack of vouchers and coupons alienated price-sensitive shoppers.

HOW might a decision to close Fresh & Easy be a difficult decision for Tesco to take?

Because Tesco had developed a strong reputation for successful international expansion and the attempt to enter the intensely competitive US market was high profile. Tesco management consistently reassured shareholders that they were confident that they could make a success of Fresh & Easy.

HOW will a strategy of retrenchment work for Tesco in the US?

Tesco will attempt to sell Fresh & Easy and its 200 stores in California, Arizona and Nevada. If buyers cannot be found, then Tesco will need to close the stores and settle outstanding liabilities including redundancy costs and leases.

WHY might a strategy of retrenchment involve significant costs for Tesco?

Because there is no guarantee that a buyer will be found for the Fresh & Easy store portfolio and support infrastructure (e.g. distribution centres). The Tesco plc Board has estimated that it will cost Tesco a further £1bn in terms of the difference between what it invested in Fresh & Easy and any potential sale value.

HOW will shareholders react to the retrenchment?

In general shareholders are likely to be relieved that the business has cut its losses in the US. Whilst a £1.2bn loss on Fresh & Easy is a large amount, it is a relatively insignificant amount compared with the overall value of the business. As a result of the retrenchment, Tesco should be better able to focus its resources on the core UK retailing brand and other better-established international operations.