Strategic Analysis of Woolworths

The purpose of this report is to provide a strategic analysis of Woolworths in its Australian retailing industry. There are some external environments that affect Woolworths’ businesses, such as discussed in Porter’s five forces analysis, which are: rivalry among competing sellers, threats of new entrants and substitute products, and bargaining power of Woolworths’ suppliers and customers. There are also some driving forces that influence Woolworths’ businesses, such as government influences and sociocultural influences.

Woolworths also has to analyze its critical success factors in its external analysis. This report also provides the internal analysis of Woolworths, such as Woolworths SWOT analysis (the strengths, weaknesses, opportunities, and threats Woolworths possesses). Woolworths’ core competencies analysis (resources and capabilities) is also one of the internal analysis Woolworths has to analyze in order to grab opportunities and avoid threats. Analyzing the value chain of Woolworths, such as its primary and support activities, will help Woolworths improve its own stores managements.

Woolworths has some business and corporate level strategies, such as cost-leadership strategy for its business-level strategy and unrelated diversification for its corporate-level strategies. Making strategies and successfully implementing them is one of the key factors of Woolworths’ success. This report also provides some recommendations for Woolworths in order for it to stay competitive in its retailing industry, such as establishing loyalty programs for its customers and managing its efficiency in order to sustain its core competencies for its long-term success.

Introduction

The industry in which Woolworths compete, in the Australian retailing industry, has been the supermarket and grocery business since its first commencement in Sydney (Woolworths, 2007). The supermarket and grocery industry in Australia is highly competitive, where the growth rate is continual, but relatively slow (always less than 10 per cent per year) (Hill, Jones & Galvin, 2004, p. c47). In the industry, some competitors for Woolworth are Coles/Bi-Lo, Franklins, Davids, Composite Buyers, QIW, FAL and IHL (Hill, Jones & Galvin, 2004, p. c47).

This statement is also supported by Beaumont (2004, p. 10), who added IGA as one of the major competitors for Woolworths. However, after the downfall of Franklins, there are only two big players who remain with Australia-wide operations: Woolworths and Coles/Bi-Lo (Hill, Jones & Galvin, 2004, p. c47). There is significant argument as how much market share the two companies each control. And according to retail market analyst Dimasi Strategic Research, Woolworths has an estimated market share of 28. 4 per cent and Coles/Bi-Lo 22. 5 per cent at the end of 2003 (Anonymous, 2004).

Company Profile

Woolworths first started its business in December 1924 as a single basement store called the Woolworths Stupendous Bargain Basement, opened in the old Imperial Arcade in Pitt Street, Sydney (Woolworths, 2007). Then, Woolworths continued to grow rapidly, and had soon acquired a chain of stores. In 1985, Woolworths acquired Australian Safeway and established itself as the “Fresh Food People” – with commitment to delivering fresh food to their customers.

In 1993, the $2,450 million Woolworths’ share float was the biggest in Australia’s history (Woolworths, 2007). Now, Woolworths has a shopping centre in almost every metropolitan and regional centre in Australia (Woolworths, 2007). The company comprises of a number of businesses, which are liquor (Safeway Liquor), electronic goods (Dick Smith), general merchandise (Big W), grocery (Safeway supermarket), and other stores such as Food For Less, Ezy Banking, Dan Murphy’s, et cetera (Anonymous, 2006).

External Analysis

In order to succeed in its retailing industry, Woolworths need to analyze its external environment. Robbins, Bergman, Stagg ; Coulter (2003, p. 82) define external analysis as “outside institutions or forces that potentially affect an organization’s performance”. An analysis of a firm’s external environment is important because “external environment influences a firm’s strategic options, as well as the decisions made in light of them” (Hanson et al. 2005, p. 45).

In this case, analyzing and understanding of Woolworths’ external environments, matched with the knowledge of Woolworths’ internal environment, and making the most of the knowledge, will enable Woolworths to form its strategic intent, to develop its strategic mission, and to take strategic actions that result in strategic competitiveness and above-average returns. External information will also allow Woolworths to adapt and change accordingly to its surrounding in order to stay competitive. This report will analyze Woolworths’ external environments using Porter’s five forces analysis, driving forces, and critical success factors.

Porter’s Five Forces Analysis

Michael E. Porter’s five forces analysis can be used as a framework for the external environment analysis of Woolworths. It comprises of rivalry among competing sellers, threat of new entrants, threat of substitute products or services, bargaining power of suppliers and bargaining power of customers. How competitive forces shape strategy (Porter, 1979)

Rivalry Among Competing Sellers

There is a high concentration in the Australian retailing industry, with only few major players competing in the industry, Woolworths, Coles/Bi-Lo and IGA (Beaumont, 2004, p. 10). Using tactics like price competition, product introduction, and advertising slugfests, Woolworths’s businesses such as Safeway is continuously competing with its competitors for a strong position in the industry (Porter, 1979). Also, according to Hill, Jones & Galvin (2004, p. c47), the Australian retailing industry in which Woolworths’ businesses, such as Safeway Supermarket, compete has a slow growth rate (less than ten per cent per year). This means that participants such as Safeway Supermarket and its competitors Coles and IGA and others fights for market share that involve expansion-minded members (Porter, 1979).

 Threat of New Entrants

The threat of new entrants for Woolworths’ businesses such as Safeway Supermarket is concluded to be low; one of the reasons is the high start-up costs. To set up a new store with a size large enough to compete with Safeway Supermarket and its major competitors, a possible new entrant needs to have a lot of amount of capital, because capital is necessary not only for fixed facilities but also for inventories and absorbing start-up losses (such as advertisements) (Porter, 1979).

Besides, strategic business places has already been acquired by Safeway Supermarket and its competitors, so possible new entrants face the risks of either establishing business in places that are not so strategic (such as in suburbs) or the risks of competing with the already dominating existing stores like Safeway Supermarket. Moreover, Safeway Supermarket has already enjoyed the economies of scale as a dominant player (Flanagan & Sanderson, 2000, p. 5), with a lot of access to distribution channels (such as a good relationship with suppliers). Therefore, the possible threat of new entrants is low.

Threat of Substitute Products or Services

There is a high threat of substitute products for Woolworths’ businesses such as Safeway Supermarket. “The key to success in the supermarket industry is an ability to manage costs” (Hill, Jones & Galvin, 2004, p. c48). Therefore, operating profits for Safeway Supermarket tend to below. Although the aim of Safeway Supermarket is to buy goods from suppliers and sell those goods to consumers in a manner that maximizes returns, substitute products will limit the attractiveness of Safeway Supermarket’s goods to its customers (Porter, 1979). Because Safeway Supermarket sells products such as foods and daily necessities, substitute products can be found easily from its major and minor competitors.

Bargaining Power of Suppliers

Safeway  Supermarket’s suppliers have a weak bargaining power. According to Porter (1979), one of the characteristics of a strong supplier is that if the industry is not an important customer of the supplier group. Woolworths’ business, such as Safeway Supermarket, owns a considerable amount of market share and therefore is an important customer to its suppliers. Safeway Supermarket is also a dominant player in the retail industry, which means that supplying goods to Safeway Supermarket is one of the suppliers’ important earnings. Therefore, the suppliers of Safeway Supermarket do not have a strong bargaining power.

Bargaining Powers of Customers

A large portion of Safeway Supermarket’s goods purchases are from individual customers and they possess a strong bargaining power. It was found that customers are drawn towards price and convenience as special attributes of making a purchase at a store (Miranda, Konya & Havrila, 2005, p. 220). Price is strongly correlated with customers’ affiliation with the store and because there are a lot of substitutes to Safeway Supermarket goods, therefore customers of Safeway Supermarket posses a strong bargaining power. Woolworths’ external environment driving forces are governmental influences, sociocultural influences, et cetera.

Government Influences

Since the downfall of Franklins, the Australian Competition and Consumer Commission became restricting the number of location of stores that Woolworths and its major competitor, Coles, can take over and operate. Even Woolworths’ plan to establish pharmacies in supermarkets was prohibited by the Commonwealth Government. Therefore, Woolworths needs set up some strategic actions in order to comply with the government influences, such as relocating an existing pharmacy into one of its stores, but still with the pharmacist retaining control (Hill, Jones & Galvin, 2004, p.c49).

Sociocultural Influences

The recent change in the sociocultural shift has been the greater number of people with high disposable incomes into central business districts (Hill, Jones & Galvin, 2004, p. c49) seeking for more convenient stores. After analyzing this external driving force, Safeway Supermarket set up a strategy such as to focus on a wide range of semi-prepared foods to offer greater levels of convenience for its customers (Hill, Jones & Galvin, 2004, p. c49).