2011

School Of Business And Law

Chaudhary Waqas Anwar MBA 2 Strategic Management B0518gggg0810

School Of Business And Law Strategic Management

TABLE OF CONTENS
1. 2. INTRODUCTION ................................................................................................................................ 3 OVERVIEW OF SCHOOL OF STRATEGIES ................................................................................... 3

2.1 The Planning School .......................................................................................................................... 4 2.1.1 Definition ...................................................................................................................................... 4 2.1.2 Discussion.................................................................................................................................... 4 2.1.3 Limitation...................................................................................................................................... 4 2.2 The Cultural School ............................................................................................................................ 5 2.2.1 Definition ...................................................................................................................................... 5 2.2.2 Discussion.................................................................................................................................... 5 2.2.3 Limitation...................................................................................................................................... 5 2.3 The Positioning School....................................................................................................................... 6 2.3.1 Definition ...................................................................................................................................... 6 2.3.2 Discussion.................................................................................................................................... 6 2.3.3 Limitation...................................................................................................................................... 6 3. 4. WHITTINGTON - SCHOOL OF STRATEGIES ................................................................................. 7 GLOBAL RETAIL STRATEGIC DICISION ....................................................................................... 8

4.1 Tesco Strategy Overview ................................................................................................................... 8 4.2 Porter's Five Force ............................................................................................................................. 9 4.2.1 Discussion.................................................................................................................................... 9 4.2.2 Challenges ................................................................................................................................... 9 4.3 Porter Dimond Strategy .................................................................................................................... 10 4.3.1 Discussion.................................................................................................................................. 10 4.3.2 Challenges ................................................................................................................................. 10 4.4 Product Life Cycle (PLC)6 4.4.1 Discussion.................................................................................................................................. 10 4.4.2 Challenges ................................................................................................................................. 11 5. CONCLUSION ................................................................................................................................. 12

REFERENCES ............................................................................................................................................ 13 BIBLIOGRAPHY ......................................................................................................................................... 15

School Of Business And Law Strategic Management

1-

Executive Summary

This report examines the Australian supermarket industry, highlighting strong performance and potential future growth. It identifies Woolworths role as an intermediary and retailer for producers, its strong growth over the past few years, and its position as the market leader in the industry. Significant socio-cultural trends identified by the report were the emerging trends towards time-poor and health conscious consumers, as well as the deteriorating economic climate. Industry attractiveness was found to have decreased in recent times, due to a rise in supplier and buyer bargaining power, greater intensity amongst rivals and higher threats from substitutes. Woolworths three main value-creating functions are: inbound logistics, where Woolworths control of the distribution network of its products helps ensure quality and distribution efficiency; operations, through which inventory management and strict quality assessment procedures assist in value creation; and marketing and sales, in which promotional activities ensure Woolworths remains competitive. Woolworths three most valuable resources and capabilities were found to be its highly efficient supply chain, its brand reputation, and its effective top-level management. Finally, it is recommended that in the short-term Woolworths invest further in advertising to become associated in consumers minds with convenience and healthy produce. Longer-term it is recommended that Woolworths emphasise its differential factors, for example by improving store atmosphere and customer service, and more importantly diversify into more profitable businesses due to decreasing industry profitability.

2-

Introduction

This report shall examine Woolworths, a Sydney Based, Australian grocery retailer, and its position in the Australian supermarket industry. Through examination of Woolworths internal operations it is hoped that a better understanding of Woolworths strategy, and subsequent success, can be gathered. Hence recommendations for future sustained competitive advantage can be formulated based on the findings from an examination of the external environmental factors affecting the industry. 1.1 Industry and Woolworths Summary The primary function of the supermarket industry is to act as an intermediary for producers, as well as to provide services to complement its sales. The industry in Australia has experienced real growth in revenue for each of the past 4 years, with growth in 2008/09 being 4.1%, taking total industry revenue to $68,500 million (IBIS, 2009). Industry GDP growth has also been strong the past 5 years, culminating in growth of 4.4% last year to reach $7,850 million. There are currently 3,760 enterprises operating 4,340 establishments across Australia. The major players in the industry include (in no particular sequence or order); Coles, Woolworths, ALDI, CostCo, IGA, Foodland, SPAR Australia, Foodworks & Franklins. Figure The focal grocery retailer of this report is Woolworths , specifically, its food and retail grocery business. Woolworths 2 operate 802 stores across Australia , has taken its total sales to $49.595 billion in 2008/09, a rise of $3.4 billion (or 7.5%), and now controls around 42.0% of the industry. Hence, Woolworths is the market leader, with its nearest competitor, Coles controlling 23% of the market (Business Day, 2009). However, with major environmental changes on the horizon it is debatable if Woolworths can maintain such impressive numbers in future. 2.0 External Analysis Salient trends in macro-environmental dimensions will be discussed, specifically socio-cultural and economic trends and how they will impact Woolworths profitability in future. The Porters five forces model shall then be utilized to assess the state of the competitive environment, and finally the attractiveness of the industry to Woolworths in the future shall be examined.
1 1

Woolworths parent company, Woolworths Limited, owns a diverse portfolio of businesses, including the Big W chain of discount stores, Dick Smith and BWS liquor retailers. Its food and retail grocery business is known as Safeway in the State of Victoria.
2

This includes the 28 added in the past financial year, well ahead of the targeted 15-20

School Of Business And Law Strategic Management

2.1 Macro-Environmental Factors Affecting the Industry Socio-Cultural Factors: One major social trend is the increasing consciousness towards health and well-being, reflected in a movement towards organic produce and healthy alternatives. This trend offers an opportunity for Woolworths, as currently there are few players in the market offering organic foods, and sales of organic foods are set to rise over the long-term (IBIS, 2009). It also constitutes a potential threat in that farmers markets and niche supermarkets which specialize in 3 such produce will thrive in the environment . Woolworths, through its acquisition of Macro Wholefoods in early 2009 4 (Speedy, 2009), have at the same time exploited an opportunity in the marketplace and neutralized a threat . Another 5 social trend would be the increasing number of consumers who are time-poor . Consequently, there is a higher demand for time convenience, i.e. the ability to patronize a store when consumers have the time. The ability to provide fulfill this need has been facilitated by deregulation in trading hours. In addition, Woolworths is providing further convenience through expansion of its product range and the creation of a one-stop shop6 Economic Factors: The current economic climate has resulted in lower spending levels, especially with discretionary goods. Hence, 7 consumers are switching to private label brands for cost savings . Subsequently, supermarkets are increasing their private label offerings. This enables them to compete on the basis of price while realizing the higher margins. Provision of private labels also enables supermarkets to compete on the basis of choice convenience, i.e. offering a low-cost alternative.

3 Farmers markets, for example, are more viable alternatives for consumers for grocery shopping . But with growing sentiment towards organic produce, they become more of a threat. This ties in strongly with the threat of substitutes in the competitive environment. 4 However, economic conditions such as lower consumer sentiment and lower income levels could have a short-term detrimental impact on the purchase of organic produce, due to higher costs 5 I.e. Consumers who are time-poor. As a result, traditional pantry-stocking trips have been increasingly replaced with more frequent top-up shopping5 (IBIS, 2009) 6 I.e. consumers would not have to go to a collection of stores to fulfil their shopping requirements. 7 Private labels currently constitute 12% of the packaged goods market, with growth of 5.9% in the year to August 2008 (IBIS, 2009).

School Of Business And Law Strategic Management

2.2 Porters Five Forces Analysis In this section, the attractiveness/profitability of the Australian supermarket industry in current times shall be assessed. This will be followed by an examination of Woolworths relative position in said industry. Threat of Substitutes: The threat of substitutes is high, as Woolworths faces many indirect competitors, such as 8 convenience stores, specialist grocery stores, and farmers markets . Evidence suggests these indirect competitors are viable substitutes to Woolworths and pose serious threats in the future: Convenience stores have also 9 experienced an expansion in product offerings and would be competing directly with supermarkets in the provision of choice convenience and one-stopping shopping. With the increasing trend towards healthy alternatives, Farmers markets selling organic produce are also poses a potential future threat. However, the threat posed by specialty stores is perceived to be minimal with the rise of increasingly time-poor consumers. Rivalry Amongst Existing Competitors:

A high degree of rivalry exists in the and is a direct result of the small number of major players in the market and their lack of perceivable differentiation due to the generic nature of the services and products provided. Therefore, 10 competition is primarily based on price, but other competitive factors include product choice and store location . Two main drivers of an increase in future rivalry are the entry of American retailer Costco, as well as the turn-around of Coles, in which the replacement of senior and middle management is set to make it more competitive and far more dangerous threat in future (Palmer, 2009).

8 These industries fulfill similar functions for consumers as they offer similar products sold by the supermarkets. Due to the large range of items supermarkets offer, there may be a potential substitute for every product category. For example, pharmacies are a substitute for the purchase of health-related products, such as vitamin-supplements offered in supermarkets. 9 In addition to providing a viable alternative choice, convenience stores pose a threat because they provide location convenience for consumers. 10 Major market players such as Woolworths are able to compete effectively on the basis of choice (Woolworths stocks around 30,000 products compared to ALDIs 600) as well as store location (Woolworths operating 802 stores while ALDI operates 200) (IBIS, 2009).

School Of Business And Law Strategic Management

Bargaining Power of Suppliers:

The bargaining power of suppliers used to be very low. With Woolworths and Coles controlling more than 80% of the market (Fenner, 2009), many local Australian producers have an extremely limited selection of intermediaries to choose from (McKinna,2009).Therefore, in many cases, Woolworths or Coles is the major purchaser, perhaps even the only purchaser, of a producers production. Even major international brands such as Kellogs and Nestle do not dare to upset either retailer, such is the power of their market-share (Wade, 2002). However, this is set to change, with the entry of Costco and the expansion of Aldi, along with the Federal Government and ACCCs recent push to lower competition barriers in the Industry (Hewett, 2009). Thus, the bargaining power of suppliers is set to be moderate in future due to a potentially larger selection of intermediaries to consign to. Bargaining Power of Buyers: Whilst low, the buying power of consumers is also set to increase in future. Once again, the aggressive push by the Federal Government and ACCC to lower competition barriers and allow new competitors to enter the market is set to increase consumer choice (Hewett, 2009), consequently increasing consumers bargaining power. Further driving the increase of consumer bargaining power would be the rise of price comparison websites such as grocery.bestpricedirectory.com.au which enables consumers to compare prices and choose the cheapest alternative. Both factors are set to bring consumers future bargaining to a more moderate level. Threat of New Entrants: The threat of new entrants is very low, and is set to remain unchanged. An insidious combination of local zoning laws and leasing agreements with landlords have resulted in an artificial scarcity of grocery store sites (Hewett, 2009). As such, this has deterred many new entrants from entering the market, especially overseas players interested in the Australian grocery industry. This is further aggravated by preferential treatment for Woolworths and Coles by landlords, due to their enormous pulling power in terms of consumer traffic (McKinna, 2009). Furthermore, potential entrants to the Australian grocery market must compete with Woolworths and Coles tremendous economies of scales. Thus the investments in infrastructure, and facilities would be massive, and the expertise to manage them all would be specialized and rare. Thus, very few firms have the expertise or resources required for such a significant undertaking, and only a few overseas players such as Costco and Aldi are able to do so ( McKinna, 2009). 2.3 Comparison of Industry Attractiveness for Woolworths Figure From the Porters Five-Forces analysis in the previous section, the Supermarket industry until a few years ago presented moderately high to high attractiveness for Woolworths, the most important reason of which was the high barriers to entry and weak bargaining power of suppliers and buyers. Hence profitability would be high for Woolworths at that point of time. However future environmental changes are set to change the attractiveness of the industry to Woolworths to moderate. Hence, Woolworths profitability is set to decrease from high to moderate in future as well. The main reasons for this would be the increase in bargaining power of suppliers and buyers, along with the greater intensity of firm rivalry with the entry of Costco and expansion of Aldi. As such, the ability to outperform its rivals and maintain its competitive edge rests on Woolworths resources and capabilities, and more importantly how those resources and capabilities are utilized in the future, when industry attractiveness and profitability has decreased from previous levels.

School Of Business And Law Strategic Management

3.0 Internal Analysis This section will begin with an assessment of Woolworths position in the food chain (i.e. extended value system) the firm participates in. It will be followed by an examination of the significant functions within Woolworths Value Chain that delivers the most value to the firm. Finally, Woolworths most significant resources and capabilities shall be identified and discussed in detail. 3.1 Examination of the Food Chain Woolworths participates in From the above diagram, it can be observed Woolworths function in the food chain is to provide producers with a channel to reach end consumers. This is because the producers Woolworths works with concentrate solely on production, hence those producers require intermediaries with retailing expertise and infrastructure. For many of Woolworths suppliers, Woolworths is a major buyer, if not the only buyer of their produce. Thus, Woolworths exerts tremendous influence over many of the small local producers and can dictate things like farm sizes, crop type, agricultural methods and prices the producers receive, which are based on Woolworths product 11 and process quality specifications (Wade, 2002). 3.2 Value Chain Analysis of Woolworths Woolworths mission statement specifies how Woolworths strives to provide consumers with the freshest produce and an enjoyable and convenient customer experience. Thus, all the value-creating activities of Woolworths business are all geared towards delivering the above promises (Woolworths, 2009). The three main value-creating functions involved in delivering the firms promises are: 1. In-Bound Logistics:
12

Woolworths is essentially a retailer. Hence it does not produce the products it sells . Instead, it controls the distribution network of its products. Within this function there are two significant activities which contribute to the firm: Procurement and Logistics:

11 For instance, due to Woolworths stringent standards with regards to appearances, the use of pesticides and herbicides used by Fruit and Vegetable suppliers have increased by a tremendous amount in order to reduce blemishes on produce, coupled with the replacement of old plant varieties with new ones to produce shiny-er fruit (Wade and Bradley, 2002). 12 Woolworths sends packaging and labeling material to its suppliers before the production process even starts, and it is the responsibility of suppliers to pack and label finished products with the packaging materials provided (Pierce, 2009).

School Of Business And Law Strategic Management

Woolworths produce goes directly from producers to a national or regional distribution centre, where it is certified for quality then transported directly to stores. Simple and efficient, this system has enabled Woolworths to reduce costs by $2.5 billion (Australian Food and Retail News, 2004). In addition, Woolworths owns and operates of all the trucks and distribution centres involved in its distribution network. This puts it in a better position to prevent 13 worker strikes and enables greater control in ensuring punctuality of shipments . Moreover, operating the distribution centres (DCs) and trucks in its supply chain puts Woolworths in a better position ensure optimum 14 15 distribution efficiency and product quality (Pierce, 2009). 2. Operations: This involves two primary activities that ensure customer convenience and value, Quality Assessment and Inventory Management: Figure

From the time the stock arrives at the retail store to when the products are put on display, constant checks 16 17 are made to detect and remove defective products . Furthermore, for each SKU there is a Minimum 18 Presentation Level (M.P.L) . Sophisticated Point of Sale (POS) technology keeps track of the number of SKUs sold for a particular product, and once stock levels fall beneath the M.P.L, a re-stocking order is dispatched to the relevant distribution centre (Pierce, 2009). In addition, Woolworths utilizes an advanced forecasting program to forecast future changes in demand due to environmental factors such as seasonal 19 changes or economic trends

13 Due to high inventory turnover rates and the highly perishable nature of many of its products, worker strikes and late shipments are highly detrimental to Woolworths as they would result in significant revenue losses and high inventory costs (Pierce, 2009). 14 For example installing automated scanners in all its DCs to ensure there are no Dags or extended tail ends in shipments which may result in unbalanced forklifts and injury to staff. 15 For instance how Quality Assessment is a major process in its DCs, with quality auditors certifying product quality at their DCs before approving the shipments transportation to retail store (Pierce,2009). 16 New stock shipments usually arrive at night, and backdoor store-men then unload the products and categorise them, at the same time quickly checking for quality. From there, store employees will stock products in their relevant section, and a cull takes place where all identifiable defective products are removed. A final check is conducted by the store managers and their subordinates to ensure no defective products are on display (Pierce, 2009). 17 Stock-Keeping Unit (SKU) The different product extensions/ variations of a product within a product category 18 M.P.L - the minimal level of stock required to ensure a presentable stock display . 19 This ensures their distribution centres has sufficient stock availability, and to ensure an optimum M.P.L at all times (Pierce, 2009).

School Of Business And Law Strategic Management

3. Marketing and Sales: Two main activities are involved in increasing sales and enabling Woolworths to compete effectively, Instore Promotions and Organizational Dynamism: Figure Woolworths holds weekly specials to boost short-term sales of certain products where prices of certain items 20 are reduced by a large percent (Pierce, 2009). This is supplemented by the distribution of sales 21 catalogues informing consumers of the weekly specials. Highly effective in boosting short-term sales and inventory turnover, an example would be how Safeway Carlton would normally sell $2000-$3000 worth of toilet paper per week, but that amount increases to around $8000 during its weekly special (Pierce, 2009). A significant capability of Woolworths would be its ability to keep up with consumer trends and environmental 22 23 changes , enabling the formulation of new strategies to compete effectively (Pierce, 2009). For instance, to keep up with current consumer lifestyles and preferences, Woolworths recently introduced its selection of easy to prepare meals under its Woolworths Fresh brand in conjunction with its monthly online interactive Woolworths Fresh Recipe guide which provides recipe suggestions and nutritional advice for healthy living (Pierce, 2009). 3.3 Assessment of Woolworths Significant Resources and Capabilities

Figure

Woolworths adopts an integrated competitive strategy, i.e. it utilizes a combination of both cost leadership and differential elements to compete, with its efficient supply chain to minimize costs, and its brand image to differentiate itself based on quality. In addition, strategic factors such as minimization of future threats and keeping the firm flexible in wake of environmental changes are also critical to Woolworths survival. Thus, with the above factors in consideration, Woolworths three most significant resources and capabilities are:

20 The aim of which is to increase cash-flow or get rid of old stock 21 A cheap and effective method of advertising (Pierce, 2009). 22 Examples would include the inclusion of Comparative Unit Pricing (C.U.P) on all of its sales labels in anticipation of the ACCCs legislation on more transparent pricing later this year, and Woolworths current focus on its Home Brand range of merchandise due to the current economic climate (Pierce, 2009). 23 This is a direct result of Woolworths continual investment in consumer research, and the macroenvironmental factors influencing the industry.

School Of Business And Law Strategic Management

1. Highly Effective Supply Chain: Woolworths efficient distribution network is both a resource and a capability in its in-bound and outbound logistics. A culmination of tangible and intangible assets such as technological capabilities and supplier relationships, it is highly valuable as it was the significant cost- savings achieved throughout its 24 entire logistics network that enabled Woolworths to achieve a higher EBIT over Coles (McKinna, 2009). The level of cost saving benefits provided is non-substitutable by any other resource. It is also difficult to imitate as the level and scope of the technological capabilities involved is highly specialized and staggering. However, should Woolworths posses an unfavourable public image or sell products undesirable to consumers, possessing an efficient distribution network would be irrelevant. Thus, by itself an effective supply chain is insufficient as a distinct competency, and must be supported by other 25 competitive advantages 2. Brand Reputation:

Woolworths reputation as the fresh food people was built over many years. This was done via positive consumer experiences with its products which can be attributed to its stringent quality assessment procedures throughout its supply chain (Urban, 2007), as well as its Fresh Food People advertising campaign. Hence, this brand reputation is valuable, as it provides meaningful differentiation to its competitors, and has directly contributed to higher levels of customer satisfaction. It is also nonsubstitutable, as the benefits provided cannot be matched by any other resource. However, it is neither rare, 26 nor hard to copy, with most of its rivals also claiming to sell fresh food . More importantly, fresh food and quality products have come to become a basic expectation of consumers. Thus, this reputation is not a distinct competitive advantage, rather it is a point of parity that Woolworths must possess in order to compete. 3. Effective Top Management:

Despite recessionary pressures and rising inflationary rates, Woolworths is still able to achieve growth rates 27 at higher than projected levels (Fenner and Raja, 2009). This can be attributed to Woolworths effective top 28 management, in particular CEO Michael Luscombe (Fenner and Raja, 2009). Further, the establishment of relations

24 Earnings before interest and tax a measure of revenue of the firm 25 Examples include effective general administration and in-depth consumer insight 26 IGA also has the motto of providing 150% fresh food, and more recently, Coles claims to be able to feed your family with fresh food recipes for under $10" 27 Woolworths 12-month sales rose 7.5 percent to A$49.6 billion compared with the companys forecast for annual growth in the upper single digits for the financial year ending 08/09 (Fenner and Raja, 2009). 28 Whose $2 billion investment in expansion, store refurbishment and expanded loyalty program is credited with acquiring market-share from Coles (Fenner and Raja, 2009).

10

School Of Business And Law Strategic Management

between Woolworths and Wal-Marts top management is a significant factor perceived as enabling Woolworths 29 to compete effectively with Costco in future , an American retailer that just entered the market (Fenner , 2009). Thus, the capability of top management in steering Woolworths through the current economic climate and continuously achieving high growth rates makes it a valuable resource. As such, it is non-substitutable by any other resource, and is hard to copy as it is difficult to acquire capable and effective senior managers. However, it cannot be considered rare: as Due to the mature nature of the sector, most of the companies operating in the 30 Australian Grocery Industry also have capable senior management . Therefore, effective top management is not a distinct competitive advantage, but a point of parity that is utilized in conjunction with other factors such as efficient supply chain to enable Woolworths to outcompete its rivals. Recommendations: The recommendations presented by this report are classified into short-term and long- term recommendations: Short-term Recommendations: In the short-term, Woolworths should invest more in advertising. More specifically, Woolworths should create advertisements depicting how their Woolworths Fresh range of healthy meals to go fits into consumers everyday routines. This would heighten brand recall of Woolworths in consumers minds, which increases purchase likelihood. More importantly, by creating advertisements linking Woolworths to healthy, easy to prepare meals that are conveniently available at reasonable prices, this would increase the chance of making Woolworths synonymous with convenience and healthy consumption, a valuable point of differentiation in a market where low prices and fresh food are now points of parity. Long-term Recommendations:

It is recommended for Woolworths to focus more on convenience and an enjoyable shopping experience in the 31 long- term . Woolworths current program to refurbish stores should be supplemented by measures to improve store atmosphere, such as the inclusion of relaxing music and having cheerful, enthusiastic and helpful staff to 32 create an enjoyable shopping experience . More importantly, in the long run it is recommended for Woolworths to invest in more profitable industries and businesses. As mentioned earlier, the attractiveness and profitability of 33 the Australian supermarket is set to fall in the future . Thus, Woolworths should diversify in new businesses in which sales growth are projected to rise over the long term, such as the home and hardware business, or up34 market organic produce .

29 The aim of which is to allow Woolworths to benefit from Wal-Marts experience in competing with Costco in the U.S. 30 Which has enabled them to survive and compete with Woolworths (and Coles) until now. 31 I.e. placing higher emphasis on differential factors to supplement its cost advantages 32 Which creates a valuable differentiation factor to competitors such as Costco and Aldi. 33 Due to higher bargaining power of suppliers and buyers, and the greater intensity of rivalry 34 Such as how Woolworths negotiated a partnership with Lowes, and American hardware chain to open up a chain of hardware stores wihin Australia due to the home improvement industry being valued at AUD $36 billion, and is set to grow even further over the next few years (Fenner and Raja, 2009), or as mentioned earlier Woolworths acquired Macro Wholefoods to fast-track its expansion into the high end gourmet organic produce market (Speedy, 2009).

11

School Of Business And Law Strategic Management

Appendix: On the 21st of August, 2009 from 1pm to 1.45pm, the Store Manager at Safeway Carlton, Ethan Pierce, kindly granted an interview to the writers of this report and provided valuable insight into the in-store operations and logistical network of Woolworths. His patience and informative input is highly appreciated, and the writers of this report would like to extend our sincere and utmost gratitude to him.

12