Marks and Spencer's Business Strategy

Introduction

In section A of this report, we will analyse and assess Marks and Spencer's (M&S) food sector business strategy. In previous consultancy task we examined UK supermarket sector and business environment. That will be crucial in understanding current M&S strategic position. Also, it will help us to identify sources of competitive advantage and at the same time opportunities for future strategic positioning. In addition, we have to be aware of company's non-financial performances as well as quantitative corporate objectives and key performance indicators. Analysing them using balanced scorecard and benchmarking method will show us, is our strategy sustainable, does it have long run perspective and direction we are currently moving. This will be covered in part B of this report

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Part A

Strategy can be defined as “the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations” (Johnson et al. 2005, pp.9). According to Porter (1996) company can do better than other companies only “if it can establish a difference it can preserve” (Porter 1996, pp.63). Delivering additional value to customers, providing them with comparable products at lower cost or both is a good way to make a difference according to the author.

Johnson et al. (2005) presented three Porter's generic strategies which could be used by companies to achieve competitive advantage: cost leadership, differentiation and focus. It can be concluded that M&S using focused differentiation strategy. According to the Bowman's strategy clock this strategy is seen as high price strategy which gives perceived high value to customers. They choose to differentiate themselves from other food retailers with: top quality own label food, ready prepared meals, fresh food and food for special occasions. They do not attract customers for full weekly groceries shopping but gives them additional value for their money with focus on freshness and quality. Their simply food stores contributed with high margins to overall sales in past few years. Also, they expanded abroad to 40 countries in order to attract new sales into the same niche. This is consistent with Johnson et al. (2005) who explained that growth may be achieved by targeting new sale at the same market niche abroad.

In previous consultancy we analyse supermarket sector using Porter's five forces framework. That helped us to better understand industry in which M&S operates. We concluded that power of suppliers is high due to a lot of supermarkets and brands. Also the threat of substitutes is high because customers now want better value for money. M&S is aware of that, especially because that was primary reason for a big decline in sales in 1990. The power of suppliers is low because of huge number of fragmented suppliers. Threat of new entries is on medium level and competition among industry is on high level.

The four biggest food retailers in UK (Tesco, Asda, Sainsbury and Morrison) have almost 76% market share. Therefore, M&S with 3.9% market share in 2009 cannot compete with lower price strategy. Their focus is more on product quality. The M&S food offer ‘has largely focused on the upper end of the mass market, typically higher than its positioning for non-food.'[1] They are selling own brand labels only to their customers which giving them value for money. It helps them in promotion of overall M&S brand. The good thing is introduction of some branded goods from 2008, because of higher targeted customers demand.

M&S food sector strategy lies on company's basic values: Quality, Freshness, and Value, Standards of innovation, Ethical Sourcing and Healthy eating.[2] M&S is premium food retailer and food sector is very important to overall group business and performance. It brings over 50 percent of group revenues in UK with sales of £4.25bn in 2009.

Previous consultancy also shows that the most influential trends in broad environment related to food industry are:

Food industry was relatively recession proof and these days UK is officially out of recession after six consecutive quarters.[3] High level of inflation in UK (CPI inflation=3 percent) is the reason which contributed to retailer's profitability. In 2009, M&S reported slightly decrease in margins and profitability. Previous year, they were moving in good direction with initiatives to cut costs (marketing, distribution, support) and reinvest that money in prices to provide better value to customers. The bad thing is reducing capital expenditures for almost 40% which have to create value in future.

Increasing number of healthy conscious consumers is a second trend. As a premium food retailer who is selling top quality food, this trend is big strategic opportunity for M&S future strategic positioning. In addition to this, survey show that only one in six customers switched to less expensive and frozen food.[4]

Today we have environmentally aware consumers. M&S is first food retailer who realizes that. Thus, they presented Plan A in 2007 with 100 environmentally commitments to complete within five years. Today, after two years they achieve 39 commitments. This strategy have aim to differentiate their food business from main competitors.

Online shopping is also today's trend and opportunity for retailers. They launched M&S direct and free wine delivery as a result of growing demand.

In 2009 M&S market share decline from 4.3% to 3.9% and this is opposite to what board of directors announced in 2008. They predicted growth in market share to 5%.[5] In formulating strategy for next year, they have to take into account few things which will have effect on customers' disposable income. From January 2010, we have increase in Value added tax from 15 to 17.5%. Personal income tax will stay at the same level in 2011.This fiscal measure will affect 70,000 people across UK who are now in higher tax band. Additionally we have announced increase in sin taxes for alcoholic drinks. Customers are today spending £36 per person per week on food in UK.[6] Previous mentioned changes will have certain impact on customers spending habits. Probably they will not cut food expenses, but some products coul be more affected. That is one reason more for M&S to provide customers with additional value for money.

Part B

Balanced scorecard

The Balanced scorecard is “an integrated set of performance measures derived from the company's strategy that gives top management a fast but comprehensive view of the organizational unit.” (Drury 2004, pp.1001). The main question behind the balanced scorecard concept according to Kaplan and Norton (2001) is how to measure future performance. The authors were aware that companies are only in 10 to 30 percent successful in executing its strategy. The main reasons are vision, people, resource and other barriers. For example non-understanding of strategy by employees or management fails to link budget with strategy objectives. Also they realize importance of intangible assets, not capital anymore in adding value to company. In this new business environment focus only on past financial measures (profit, cash flow) and not taking into account non-financial performances such as customer satisfaction could be fatal for organization. The authors presented framework and suggest every company to be viewed from four perspectives: financial, customer, internal business process and learning and growth perspective. All financial and non-financial measures and objectives should be based on company's vision and strategy. That will help managers to have overview over whole processes in company and employees to better understand global firm's strategy. We will use suggested framework to support formulation and implementation of Marks and Spencer's current strategy.

1. Financial perspective

Kaplan and Norton (2001) argue that non-financial perspectives are important but the same is with financial perspective. The reason is simple. Effects from other three perspectives will show their impact through company's financial performances. Marks and Spencer current financial objectives on group level and business unit level are to reduce costs and manage cash flow.

In 2009, the effect of broad environment and recession in UK impacted direction of M&S strategy. Because of decrease in UK food sector sales and decrease in market share from 4.3% to 3.9 % they choose to reduce costs with aim to keep profitability. Food gross margin was down 235 bps at 31.5%. We can continue to use gross margin as performance measure. Also, we could use profitability measures such as Operating profit, Return on equity, Return on capital employed and net margin which are already being used as M&S key performance measures. The results of reducing costs are, reduced spending in support areas and marketing activities of 8.6% without threatening customer satisfaction (stayed at average high level of 84%) and increase of only 1.9% in staff costs. These activities will have impact on profitability in coming years. The target for next year should increase of 10% in mentioned profitability measures. On the other hand, significant cut in capital expenditures of £450 million had immediate impact on company's cash flow from investing activities. M&S also have to focus to on how to improve operating cash flow. They decreased cash conversion cycle for almost 6 days.[7] They should further monitor debtor payment period, creditor collection period and stock clearance period (decrease from 8.7 to 4.29 days in 2009).[8] In future, decrease of 10-20 % in stock clearance period and cash conversion cycle could help the company to have stronger cash flow.

2. Customer perspective

Main objectives of M&S in order to increase market share, acquire new customers and keep customer satisfaction on a high level are to provide customers on targeted market with additional innovation, improved on-shelf availability and to give them additional value for money. The last have roots to year 1935 slogan “Don't ask the price it's a penny”[9]. They took numerous promotions like “Wise buys”, ‘Family favourites for £4' and ‘Dine in for two for £10' during the year. Despite this investing in prices across food range have impact on company's margins, it also provides customers with better value.

In 2009 survey, M&S is recognized as a leader in top quality food. In future, they should increase ‘wise buys' products from existing 10% food range and set target measure to 15%. Also, innovation in products should be continued and monitored with comparing percent of new products in overall products. Relating to on-shelf availability, they already employ more people in stores, open new 75 and close 26 stores with underperforming performances. This trend should be continued because it gives customers more convenience shopping. Customer loyalty, satisfaction and quality customer service are important in future period especially when market share declined 0.4%.

3. Learning and Growth perspective

Kaplan and Norton (1996) recognized importance of intangible assets and employees as most important resource company have. In order to keep customers satisfied and loyal, company need to invest in its employees, systems and organizational procedures according to Drury (2004). Therefore, employee satisfaction, investment in employee skill and training must not be overlooked.

M&S have good communication with employees via M&S intranet and employee magazine. The results from employee satisfaction survey ‘Your Say' show high response rate (90%) and consistent score with previous years of 70%. Another two measures could be applied to measure employee capabilities- employee retention and employee productivity. Last two derived from employee satisfaction, because only satisfied employee could be productive.

Investment in employee skills is recognized as important for M&S. Thus, organization of development programme for 2000 lines managers, leadership programme and food academy are vital for future growth and development.

The aim to become most sustainable retailer by 2015 they converted into the Plan A. It is also in accordance with Food industry sustainability strategy presented by DEFRA in 2006. They already fulfilled 39 commitments in order to become energy efficient, send no waste to landfill and become carbon neutral. Target of accomplished 15 new commitments per year will keep them on right way to reach this strategic goal.

4. Internal business process perspective

According to Drury (2004) internal business process perspective need to give answer on question what business processes will increase value to shareholders and customers and help company achieve its vision at the same time. M&S recognizes that investment in innovation process and operation process (decrease distribution costs, maintain supplier satisfaction, increase efficiency in value chain and process quality) are vital to succeed.

M&S already presented innovation in food from national cuisines (Italian, Chinese etc.) and should monitor percentage of sales from these new products, also compare themselves with competitors (at first place Waitrose who is concentred on the same market niche- top quality food). To excel in innovation field, they should also focus on market products in which they are first or second in the market according to Drury (2004).

Innovations in operation process has aim to make more efficient supply and value chain in a company. On one side we have suppliers and customers on other. Already half of 2000 suppliers were trained on M&S ethical standards. Distribution costs will be managed with implementation of SAP software and building of domestic and international logistic and distribution centres. Once a build, they will significantly decrease distribution cost and time.

Balanced scorecard method (BSC) will help organizations to translate vision into performance measures and improve communication within the company. Also we have to be aware of some limitations of BSC. Othman (2007) argues that BSC is static, ignores external environment and treat company as mechanical system. Drury (2004) describe that empirical study failed to provide evidence that link between non-financial data and financial performance in future exists- which is the assumption of BSC method.

Benchmarking

There are numerous definitions of benchmarking. One of the first books written about benchmarking providing definition of this method was in “The search for industry best practices that lead to superior performances” in 1989 by Camp. Until today many definitions emerged but still the most quoted one is from this book that says “Benchmarking is the search for the best industry practices which will lead to exceptional performance through the implementation of these best practices” (Ungen 2007,pp. 335).

In this part, we are going to look at our internal strength and weaknesses, make comparison with our closest competitor in UK market- Waitrose, because both have almost the same market share of about 4% and the same market focus- top quality food. At the end, we will make comparison with Tesco and Sainsbury as a market leaders and see could we use knowledge to improve our operations. Here the aim is to learn from our competitors, not only to compare with them.

First we have to understand our internal position- segments we are good at, possible opportunities and segments where improvement is needed. M&S differentiate itself with high quality food and at the same time have perception among customers as a top food retailer. It has strong brand for last 125 years, strong internal financial sources and good communication with customers and suppliers. Almost 100% own label food is advantage but at same time could be weakness. So, they start selling branded premium food which they do not produce. Main opportunity is in further expansion to international market. Today, M&S has 296 stores in 40 countries with significant 26% increase in international sales. In future, they should expand more as a wholly owned business, not as franchising business.

Second, comparison with Waitrose we will start comparing their financial performances because they will show us how successful other perspectives from the balanced scorecard are. An M&S food sector sale is down 0.1% at £4.25bn with loss of market share of 0.4%. On the other hand, in the same period Waitrose increase its sale for 5% to £4.2bn, market share 0.4% and decrease in operating margin 45 bps to 5.1%. Increase in Waitrose's margins is at some part result of 13 Somerfield stores acquired in 2008. Waitrose is also focused on premium organic food brand. Comparing with Waitrose, M&S opened 47 stores more and is selling 3600 products more with much more own label food selling. This store opening trend in previous years was primary reason for margin increase but now M&S should closely monitor store performance (already close 26 underperformed stores in 2009) and different product lines and replace slow selling products. M&S in terms of pricing is above Waitrose and selling almost 100% own brand food with products made in UK is major difference from competitor.[10] As a result their sales depends entirely on own label products. In addition to this in 2009 M&S made a cut of £127m in marketing activities which was important for him in food sector positioning.[11] In Corporate social responsibility section, M&S is leader with presented 100 commitments plan A. Also partnership with Amazon will help them improve on-line shopping segment. On the other hand, Waitrose presented online food delivery service which could be next step for M&S in satisfaction of customer needs.

In UK food retail sector, major market share has Tesco and Sainsbury. They both have access to economies of scale and price promotions are fundamental part of their strategy. On the other hand, M&S differentiate itself with providing additional value not cheaper price to customers. Despite different in size, M&S could use good practice from leaders to achieve better results. Sainsbury launched these days promotion ‘buy now free next time'.[12] M&S could implement these on 500 wise buys products which are 10 % of range in a one month period and closely look at sales, profit margin and overall financial effect. Also, Tesco since last year increase 29% percent increase in marketing activities.[13] In year where we have 13.8% drop in organic food sale, cutting marketing activities as M&S did should be re-examined. Tesco, for example offer double points in order to keep customer loyalty. M&S has only 39 outlets out of 668 stores in UK. This number should be increased in future because of rising consumers demand for convenience shopping. Also, search for value and healthier eating will be still in customer focus.[14]

Benchmarking can support BSC with recommendations from outside the company how internal, customer and learning and growth perspective could be improved. One of the main critics to benchmarking according to Johnson et al. (2005) it will not identify the reasons for company's good or poor performance. But Benchmarking as a tool have aim to improve company's performance and can support BSC. Therefore, synergy between benchmarking and BSC and implementation of current trends and best practice into organization will improve financial perspective of our company.

Conclusion

This report showed importance of understanding broad environment and market sector in strategy formulating and implementation. For example, mature supermarket sector in UK is one of the reasons for M&S's decision to invest in developing countries in the same premium food market niche.

In part B we showed changed focus from capital to intangible assets and from financial to non-financial measure. It is important for M&S to monitor all four perspectives in order to have sustainable long- run strategy. Also it is vital for M&S to understand what facors influence the financial and operational performance. Therefore, benchmarking and BSC should be used together in strategy formulation and implementation.

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