Terry Leahy Speech to the Institute of Directors

Introduction – the power of competition

If you go to any street market this weekend you will see a scene that has not changed in centuries. No – not a politician kissing babies or developing a sudden interest in fruit and veg. But stall holders crying their wares, trying to catch your eye.

Competing with each other. Trying to get you to spend your money with them and not the next stall along.

That was how Tesco started out life – as a market stall. The smallest of small businesses. Today, thanks to our customers, we have become one of Britain’s biggest businesses. We have gone from competing on an East End street to competing on the world stage.

I am going to try to explain how we have done that, and I am happy to take some questions afterwards.

But first I want to say something about success and British business.

Last week, we published our Results, which were pretty good. So good indeed, that I know there are some people who say that it would be good if Tesco was a bit less successful.

I don’t know about you, but I struggle with the idea that we should want British companies to be a bit less successful – to be good, but not too good.

In business as in sport, I just don’t see how you can set out to be half-good. We all know what happens in boxing if you pull your punches. You get knocked out. And it’s the same in business.

All of us in this room are striving to be better than our competitors. And the more British success stories there are, the more business there will be for all of us.

And then there are those who say that Tesco needs more regulation. Actually, we already have a very effective regulator. It is called customers. Our customers haven’t just made us big. They also stop us getting over-mighty. It’s very simple – if we get too big for our boots, and stop doing what our customers want, they will vote with their feet, and shop down the road.

In the last year, we have won an extra 10 million customer visits a week around the world. But I know in a sector as competitive as retail that we could lose them just as quickly as we gained them. Believe me, that is a far more powerful sanction than any regulator can deploy.

Just as voters help keep politicians honest, so the power of customers keeps businesses on the straight and narrow. They are our very own X in the box.

And I simply don’t accept the notion that customers are only interested in price so all you have to do is keep prices low and they will be happy. Anyone who says that simply hasn’t talked to customers. Customers don’t leave their values and morals at the supermarket door when they see the next Special Offer.

Of course, they care about value. But that doesn’t stop them thinking about other things – for example, the environment or fair trade. When they go shopping, they don’t stop caring about their neighbourhood and what goes on in it. They don’t stop believing in fair play.

Companies like my own have to balance these interests the whole time and listen to the sometimes conflicting things our customers tell us. But to be able to do that – and act on what they tell us – there’s no getting away from a simple fact. You have to be successful in the first place.

It’s profit which means we can look after our staff. It’s profit which has helped us regenerate local communities and create new jobs and training for the long-term unemployed. It’s profit which means we can invest in helping our suppliers develop new markets, whether that is here in the UK or in developing countries on the other side of the world. As we grow, others grow with us.

This year our staff have benefited from £169 million paid out by some of our company share schemes. We will be creating another 25,000 jobs worldwide. We have been able, for example, to help in a small way rebuild the Sri Lankan economy after the tsunami by boosting our orders for tuna from local fishermen.

For Tesco to succeed, we need our suppliers to succeed. Good long-term relationships can only be based on trust. To help build that we have set up a new scheme called Supplier Viewpoint. This enables our suppliers to tell us – completely anonymously – how they feel about us, what works well, and what could be done better.

What does that feed-back tell us? That we operate commercially, professionally, certainly – I would expect that. But also that we are fair and straightforward to deal with. The majority say that working with Tesco has helped them improve their business.

They have also given us some ideas as to how we could do better. For example, they would like us to simplify how we work with them so that they do not have to deal with a number of different parts of the company. They would like us to do more to make ourselves available and to help them tackle problems they might have. This is all really useful information and gives us simple, practical advice as to how we can raise our game and build good, long-term relationships.

If customers keep business on its toes, so do our competitors. At Tesco, for example, we face ferocious competition not just from the other well-known names on the high street. But from Wal-Mart – many times bigger than us – Carrefour, Metro, Casino, Aldi, and all the rest, battling it out for market share around the world. And as new markets open up on the other side of the globe, and advances in communications and other technologies shrink distance, so the competition is going to get fiercer still.

It is this theme – competing in world markets – that I want to talk about today.

Putting it in context

In fact, Tesco are relatively new boys in terms of competing in world markets. If I go back just over ten years, we didn’t have any business overseas. Nothing. We weren’t competing on the international stage. In fact at the beginning of the 90s, we weren’t even competing that well on the national stage. We were Number 3 in the UK, and it was our competitors who were making the running.

Today, we are Number 3 in the world, having become No 1 in the UK along the way. We are in 13 countries, and market leaders in 6 of them. We now have as much space outside the UK as within.

And we don’t just sell food any more. We are now competing keenly in clothes, pharmacy, electrical goods, books, music, telephony, and financial and legal services, and on-line as well. This year, these new businesses created since 1997 delivered more profit than the entire group did in 1997.

So how have we done it?

I could tell you about our fantastic staff and managers. The way we have used technology to improve supplies and distribution. The patience and commitment of our investors. The importance of a stable economy here in the UK. All of these are true, and certainly we couldn’t have done it without them.

But if I think about what has really made the difference to our ability to compete internationally, this would be my top 4:

We have been clear about what we wanted to achieve.

We have listened to what our customers have told us.

We have given responsibility to our managers and staff.

We have kept things simple.

These are principles that have worked for us, but I think they could work for you too, as they apply to businesses of any size.

But the bigger you get, the more international your business, the more important they are. If you follow them, I believe they can help make a small business big. But if you ignore them, you might find yourself making a big business small.

Let me say a bit more about each of them.

1. Being clear about what you want to achieve

Businesses need to be able to move fast and ideally as fast as customers themselves change. But they also need a centre of gravity. As the compass spins, they need to know where they can find True North. They need points of reference, which they can always come home to in any situation.

Shortly after I took over at Tesco, we sat down and asked ourselves some simple questions – what are we for? What do we believe in? And where do we want to go? Asking them was the easy bit. Answering them was harder. But this is what we came up with.

Our core purpose? One short sentence. ‘To create value for customers to earn their lifetime loyalty’.

Our values? Just two. No one tries harder for customers. And, treat people how you would like to be treated.

Our strategy? Just four things.

1. To build a strong core business here in the UK.

2. To become as strong in non-food as we are in food.

3. To develop a profitable retailing services business.

4. To be as strong internationally as we are domestically.

2. Listening to Customers

But it’s no good having a fantastic strategy if you don’t have any customers. 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. It is a reputation we have worked hard to earn. Whatever I am doing, wherever I am, I always try to spend at least two days a week, out in the stores talking to customers and staff. Getting ideas. Finding out what is working. Finding out what isn’t working – and learning how to put it right.

And it’s not just me. All of our directors and thousands of our managers spend a week a year back working in one of our stores – stacking shelves, working the tills, serving customers, reminding ourselves of what we do for a living. At Tesco we don’t want managers like First World War generals, sheltering in some chateau far from the action. We want them in the front line, with the troops, experiencing life at the sharp end.

We are constantly checking what our customers say and what they do. Every year, for example, we interview 20,000 of them directly. In any week, there are 120,000 contacts at our Customer Service Centre – all of them giving us useful feed-back. And of course Clubcard helps us understand customers better too.

Why do we do all this? It’s not because we are nosy, but because we have seen how customers have transformed our business. All the innovations that have powered our success have come from listening to our customers and watching how their lives are changing. Whether it’s Clubcard, Express stores, Value and Finest lines, or Tesco.com – they have all been ideas that have come directly from our customers.

So my second piece of advice is: trust what your customers tell you and follow where they lead you. If you do, you won’t go far wrong.

3. Encouraging Responsibility

If you follow that advice and grow, success will bring 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?

Take Tesco. For us the challenge was: how do you 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 people in 2,300 stores, with such a rich cocktail of languages, cultures and religions?

Well, let me tell you how we haven’t done it. We haven’t done it by trying to control everything from the centre. We haven’t done it by endless targets, blueprints and directives. And we haven’t done it by setting up lots of committees and bureaucracy. We’ve done it by trying to remain true to the spirit of the market stall.

Unnecessary rules and regulations, whether 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 if our stores in China had to ask my permission to stock a line. While some committee was deliberating, our competitors would have gone ahead anyway and scooped up all the business.

So as we have moved into new markets, we certainly haven’t tried to impose one Anglo-Saxon world view from the top. In fact, quite the opposite. We may have gone global. But we have been determined to stay local.

To do that, you need good local leaders. And that means you have to trust people on the ground. Yes, we have been careful to choose excellent managers and staff. Yes, we have helped them train and learn – at any one time, 1 in 10 of our staff are training to move up to the next level. We have promoted from within and we have provided all our staff with a very clear framework of values. But above all it has been down to that very simple but powerful word – trust.

4. Keeping Things Simple

All businesses should try to keep things simple. It speeds things up. It makes it easier for your employees to know what is expected of them. It saves money.

But of course, the bigger you grow the more important that is. Think how many billions of actions our three hundred thousand plus 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.

Let me give you one example. When fast selling goods were delivered to our stores, our staff would have to unload them. They would have to move the goods to the shelves on a trolley. And then they would have to unload the trolley and stack the shelves. Each time the shelves emptied, they would have to do the same thing all over again. Time-consuming. Inefficient. And gets in the way of customers.

So what did we do? Working with our suppliers, we made a simple change. Now many of the goods arriving at our stores come ready stacked onto moveable shelves. The shelves are then rolled straight into position in the aisles. So, there’s far less unloading and stacking. That saves us time and means that the shelves are kept filled. That means there is a lot more for customers to buy, and more opportunities for our suppliers to sell more of their goods.

A simple idea certainly. But one from which everyone benefits. It makes life easier for our staff, improves the service we can offer to our customers, and boosts sales for our suppliers. It delivers savings and profits which we can then invest in lower prices, thus creating another virtuous circle.

Let me give you two other quick examples of how we try to keep things simple. First, we are a very flat organisation. There are just six levels from the frontline to me – so there are only five rungs on the ladder to climb. So no great hierarchies and job titles to complicate things and keep people in their place. A nice simple structure that is designed to be open and to encourage talent to rise to the top.

Second, we have a very simple management tool that helps keep us on track. If you went backstage at any one of our stores you would find a big chart on the wall. We call it the Tesco Steering Wheel. Why? Because it looks just like a wheel and it helps us steer the business. It is broken down into a number of performance measures which we monitor and review regularly. And there is a simple system so that every time they go in, staff can see at a glance how they and their store are doing, and whether they need to be doing anything differently.

It’s a very simple idea, but one that helps people understand how they fit in to the bigger business and how their contribution can make things different.

Conclusion

As we are only a week away from polling day, I don’t think I am going to be able to get away without saying something about the General Election. So first let me say to all those nice people who suggested in an opinion poll that Tesco might do a good job of running the country – thanks, but no thanks. It’s hard enough just working in shops so we’ll stick to what we know and leave the politics to the politicians.

But if British companies are to compete in world markets, is there anything that governments can do to help?

Well, I suspect most of us aren’t looking for help. In fact, we would probably settle for being left alone. We don’t want special favours, but we do want economic stability. Against that background, my view is that the consumer picture in the UK is still unclear. The economy relies on a confident consumer, and I hope that this will weigh heavily on any interest rate decisions.

Businesses need to know that we can plan ahead with a degree of certainty. So we want low inflation, steady interest rates and good labour laws. We’ve had that stability for the last ten years or so, but it is something that governments can never take for granted.

The other battle we have to keep up is the battle against too much regulation. I know there are some big businesses who seem to think that regulation is a way of keeping out the competition from smaller firms. We are not one of those. We line up with small business in not wanting new regulations. The IoD’s business manifesto is very clear about the damage that regulation can do. It also has some interesting ideas as to how the burden could be cut.

The other business burden is the tax burden. I don’t think it is a state secret to say that business would be very unhappy to see taxes going up after the Election.

There’s a very simple reason for this. If British companies are going to compete in world markets, we need a strong home base. We need profits so that we can invest, employ people and expand.

But I am optimistic about the future because I believe that the same dynamic of competition which drives companies like 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 can’t hide from the global marketplace any more than we can.

Competition has been great for Tesco. It has made us better at our job and spurred us into new directions. It will keep driving us forward and keep us up to the mark. And I believe that it will also help make sure that within this big body of ours there will always be a small business heart beating strongly. (Thank you. Tesco)