UK Supermarket Sector Analysis Term Paper

Political

  1. The majority of the UK supermarkets have international presence (USA, Europe, UK) thus potentially has more influence in each of the regions: can use bargaining power against the governments by threatening to move to another country if for instance taxation becomes too heavy.
  2. The Food industry historically seems to have been a matter of national pride, plus is of strategic importance thus most of the governments including the UK are likely to support the supermarkets.
  3. The supermarkets are wonderful employers hiring a great number of unqualified staff.
  4. Being good employers, supermarkets contribute to the lower unemployment rates in the countries of corporate presence and thus is liked by the government.

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Social

  1. Supermarkets are socially supported with the UK people taking pride in their national corporations.
  2. Companies at present keep launching numerous social programs that also serve the public relations purpose.
  3. The supermarkets in the UK because of their international (European and US) presence have distinct corporate cultures mixed in one company that can be either rather beneficial (synergy) or can be lethal for the whole company should the cultures turn out to become incompatible.

Economic

  1. Supermarket industry is positively correlated to the general economic conditions of economy.
  2. The larger the supermarket chain the less vulnerable the company is to the downswings of the economy.
  3. By having presence in different countries the vulnerability of the new entity is much smaller compared to the individual companies if taken separately.
  4. By operating in the food sector, the supermarket chains still are open to a great competition.

Technological

  1. Supermarkets do not engage in buying or developing sophisticated technology.
  2. The UK supermarkets just like the US supermarkets deploy the inventory control system for its supermarkets.
  3. The multinational supermarket chains benefit from the expertise of the world technological leaders who provide software for the supermarket chains (UK, USA, Europe)

Legal

  1. The majority of the UK supermarkets are of international nature yet are headquartered either in the UK or the US.
  2. The corporations meet all the legal requirements for supermarkets regarding the food safety, etc.

Ethical

  1. From the Utilitarian point of view it is ethical to have the supermarkets existing in this world because it contributes to more order for all by providing people with foods.
  2. The larger the company the less vulnerable the company is, thus the less stressed the employees are regarding the possible fear of being laid-off should the company economic situation deteriorates.

As one can see the external environment, still seems to be rather favorable for the UK supermarkets, with the political, social, and legal aspects being easily covered by the new corporation.

In order to see the dynamic collaboration of the corporation with respect to the suppliers, customers, competitors, as well as buyers, and product substitutes one should consider the 5 forces model proposed initially by Michael Porter. Please refer to the chart below for visual presentation of the 5 forces that influence supermarkets in the UK. Please refer to the addendum section for the visual representation of the porter’s 5 forces.

Bargaining Power of supermarket Suppliers (all sources for production input)
The bargaining can occur when: There are only few larger suppliers (which is the fact for supermarket industry), no Substitute for certain input good and the suppliers’ other customers are marginal and have no influence on suppliers, high switching costs between different suppliers and there exists Supplier vertical integration to the point of individual opening of supermarket chains.
In some of the situation mentioned above the companies face direct pressure from the producers to the point producers influencing the strategic goals of the corporations.

Bargaining Power of Customers/ Clients
The bargaining of customers/ clients can occur when: large volumes are bought and the buyers are concentrated, the suppliers are small companies and The suppliers have high fixed costs, there is analogous product on the market and Customers can easily switch to substitutes without incurring high costs, customers are price-sensitive, and the product isn’t strategically important to the customers, the production cost of the product is known to the customer and Customer integrates backwards to the point of producing the goods themselves

Threat of New Entrants
The competition in an industry will be the higher; the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry.

Entry barriers are imperative for new entrants Like: Economies of scale (minimum size requirements for profitable operations), high initial investments and fixed costs, cost advantages of existing players due to experience curve effects of operation with fully depreciated assets, Brand loyalty of existing clients, protected intellectual property like patents, licenses etc, availability of the strategic resources (like personnel), Ease of access to the raw base, Distribution channels accessibility, Customer and producer relations (contract binding), Legislation and government action

Threat of Substitutes
If there is a similar good for less price such threat exists, if the complementary goods fail to exist the main product also suffers.
The factors influencing the substitutes: Brand loyalty of customers, customer relations (binding contracts), how easy it is for customers to switch to another product, price of the substitutes, present day fads.

Existing Players Competition
Same industry and many players usually means that there is a competition for the existing clients. The outcome: prices go down, profitability of each competitor goes down, efficiency increase is encouraged.

Factors influencing the competition between the industry players: Players are of the similar size and are in great quantities, Players deploy virtually identical corporate strategies, Players do not differentiate much in their product but rather use reduce price, Players can grow only at the expense of other players, zero-sum game of the industry, payers cannot afford to exit the game

Conclusion and Recommendations:
Below go the generic strategic proposed by Michael Porter and are meant to stem the 5 Porter Forces:

Cost Leadership Strategy
This strategy means that the supermarket chains (like Safeway or Tesco for instance) have the smallest costs of production and thus has the absolute advantage over its competitors. The company in this case can either undersell the competitors to conquer more market share or just sell at an average price to enjoy the benefits that arise from the abnormal profit margin. Should the price war occur the cost leader can survive the longest at least in theory.

As we can see the cost leadership targets as a rule a broad market, and we can assume that the cost leadership should be a strategy that every supermarket chain regardless of its size should undertake. With the mergers of various supermarket chains already contribute to the lower costs because of shared management and facilities.

Tesco, Safeway or SAINSBURY’S can improve efficiency, establish more favorable terms with the suppliers, engage in outsourcing, or vertically integrate in order to reduce the costs even further.

All Tesco, Sainsbury and Safeway have the following internal strengths to engage in cost leadership strategy:

  • The company has already entered the market with high entrance barriers-no substantial expenditures are forecasted.
  • The company can make use of the cost-minimization strategy
  • One can assume a decent level of expertise present in the marketing in the company.
  • The distribution channels had increased in quantity and cover various geographic areas.
    Risks: Other firms (like Waitrose, Budgens) can also lower their costs. If there is a technological invention that can increase efficiency the advantage can also disappear.

Differentiation Strategy
A company should develop and market a product that is perceived by the customers as different from other similar products developed by the competitors. If the customers perceive additional value in it, they can agree to pay extra price for it. The premium price covers marketing and extra-features expense in the firm. If the product is perceived as unique by the customers, the company can pass the possibly increased costs on to the customers by charging them extra and not being afraid of losing customers who believe they cannot find similar product.

Tesco and Safeway have the following internal strengths to engage in Differentiation strategy:

  • Access to leading scientific research.
  • Highly skilled and creative product development team.
  • Strong sales team with the ability to successfully communicate the perceived strengths of the product.
  • Corporate reputation for quality and innovation.
    Risks: change in the clients’ preferences and imitation of the given strategy by the suppliers. Competitors that practice focus strategy can achieve even higher differentiation.

Focus Strategy
The focus strategy means a strong concentration on particular market, segment, or product by a corporation. In other words, a company that spreads its resources too thin usually cannot do well in all of them, thus the company should focus only on the areas it does best in. The company can expect a high level of customer loyalty that in turn will discourage the competitors from entering in the given niche. The corporate presence on the European, British and American continent makes this strategy together with the cost leadership strategy the winsome attempt for Safeway and Tesco not only to survive and stem the competition but also to achieve extra returns and increase in the shareholder wealth.

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist.

Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well.
Risks. The target niches do change as well as competitors can attempt to imitate us by engaging in focused production.

Bibliography:
www.safeway.com
www.tesco.com
Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors (graph of 5 forces)
Mintzberg, Henry, Lampel, J., Ahlstrand, B., Strategy Safari: Guided Tour through the Wilds of Strategic Management, Oxford University Press, 2001.
www.bloomberg.com (prepaid archive service. Topic: General information about UK supermarket chains)
www.reuters.com (prepaid archive service. Topic: General information about UK supermarket chains)\

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