1.0 Introduction
The aim of this report is about the Strategic Management Process and how it related to the retail industry. The retail industry that was chose to support this report is J Sainsbury Plc, the third largest chain of supermarkets in the United Kingdom. In Strategy Management Process, it consists of three major sections which are, first, the Strategy Analysis, then follow by Strategy Formulation and lastly is the Strategy Implementation. In Strategy Management, there are various types of Strategy Analytical tools to apply to find out the Strength, Weaknesses, Opportunity and Threats of an organisation as all the organisations will face its glory time and difficulties. Generally in the retail industry, Strategy Management is the most common plan to use to seek the problems or opportunities available to overcome the crisis and driving high performance in the long term (Accenture.com, 2009). Few chosen tools such as Porter’s PEST Analysis, Five forces, Value Chain Analysis, Portfolio Analysis, Generic Strategy, Control System and Strategy Process were further explained and supported in this report.
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2.0 Strategy Analysis
According to Ron Meyer (2004, pg44), analysis is the first step to develop a strategy decision. In Analysis stage, an organization has to identify the opportunities and threats in the environment, as well as the strengths and weaknesses first before proceeding into strategy formulation. These are commonly known as the four factors of S.W.O.T. analysis. SWOT analysis will help to identify the issues that are must critical to the future of the organisation.
As for the first part of the analysis, factors which are external to the organization are the opportunity and threats. While for the internal factors are the strength and weaknesses. There are strategy analytical tools to identify the external and internal factors. PEST is one of the tools that can trace the opportunity and Five Forces can use to identify the threats of the organization. On the other hand, value chains analysis can apply to identify the strength and weaknesses.
2.1 Opportunities and Threats
An organization’s Opportunity and Threats are affected by external environment. Opportunities are external conditions that are helpful to achieving the objective of an organization while threats are external conditions that are harmful to achieving the organisation’s objective.
2.2 Strengths and Weaknesses
Internal Environment affects an organisation’s Strengths and Weaknesses. Strength are the capabilities of the organization that are helpful to achieving the objective whereas, Weakness attributes of the organization that are harmful to achieving the objective.
2.3 Strategy Analytical Tools for External Environment (Macro-Environment)
Strategy analytical tools such as PEST and Five Forces can identify the external environment factors to an organization.
2.3.1 PEST Analysis is an External Environment Tool that Identify the Opportunity of an Organization
Thomas L. Wheelen (2010) points out that the general environment consists of all conditions in the external environment that forms a background context for managerial decision making. In other words, general environment is the outer layer that is widely dispersed and affects organizations indirectly. General environment can be affected by Political factors, Environmental factors, Social factors and Technological factors or in acronym, “PEST”.
Political Factor-Political factors refer to the government policy such as the degree of intervention in the economy.
In United Kingdom, government decreases the rate of corporation tax from 30% to 28%, which can save or help big companies like Sainsbury’s significant sums of money. (HM Treasury 2008).
Economic Factor-Interest rates, taxation changes, economic growth, inflation and exchange rates are factors of economy.
As the global food crisis rapidly increase has increased the food prices all over the world which caused the rising purchasing costs for Sainsbury’s (economist.com 2008 [online]). This will have an impact on the margins of the organisation and might lead to passing over the cost to consumers by increasing prices of most things in the supermarket. In addition, fuel price increases will have implications right throughout the supply chain of Sainsbury’s leading to an overall situation to price hike.
Social Factor-Richard Lynch stated that (2006) the demand of a firm’s products and the availability and willingness of a person to work can be affected by the changes of the social trends. Nowadays there seems to be more emphasis on fresh, easy style cooking. This serves an opportunity for Sainsbury’s to encourage new recipes and unfussy eating. Moreover, people are more emphasis on healthy eating style mostly due to the increasing level of obesity which leads to many consumers to shift towards healthier food. This new trend has presents a beneficial opportunity to Sainsbury’s to stock up with more healthy food or create healthier foods at a cheaper price than other manufacturers.
Technological Factor-New technologies can create new products and new processes that can reduce costs, improve quality and lead to innovation.
Sainsbury invested new technology of “Smart Grid” to cuts energy costs and reduces UK carbon emissions rate. The system monitors the grid and activates the store’s biofuel generator when there is an increased demand for electricity. As a result, reserve power stations will not have to be used as much and the UK’s carbon footprint will be reduced. The generator is the first of its kind and will be powered by waste oil and fat from Sainsbury’s stores to act as an auxiliary power source. Additional technology in the store will reduce strain on the grid further by deactivating or reducing the store’s heating, ventilation and lighting systems at peak times. This is an opportunity to Sainsbury as they use the waste to produce electricity rather than using other source, hence, they can save up the electricity costs. (Sainsbury.co.uk,2010)
2.4 Five’s Forces Model to Analysis the External Environment
Five forces model is an analytical approach use to analyze a firm’s industry environment. Factors that are considered in five forces analysis are the risk of entry by potential competitors, bargaining power of suppliers, bargaining power of buyers, threat of substitute products and rivalry among established firms. (John A. Pearce, 2011)
The Bargaining Power of Suppliers-Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased good and services. It should be noted that the suppliers are inclined towards major food and grocery retailers and dread losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Asda, and Sainsbury’s is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers (Ivorysearch.com).
In November 2006, Sainsbury has announced that they are the first to launch new payment management system to make it easier and quicker for suppliers to access account information and gain early payments which has built a strong relationship with the supplier. Suppliers can view their trading account through internet, this giving the supplier better visibility of their expected cash flow. This is also an opportunity to Sainsbury as they have a good relationship with the supplier (PrimeRevenue.com, 2009).
The Intensity of Competitive Rivalry-In most industries, corporations are mutually dependant. A competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may cause retaliation.
The intensity of competitive rivalry in the food and grocery retail industry is extremely high. Sainsbury faces intense competition from its direct competitors, including Asda, Tesco, Morrisons and Waitrose, which are competing with each other over price, products and promotions intermittently. It should therefore be highlighted that Asda is one of the key competitors in this segment with an increase of market share from 16.6% to 16.8% during the fiscal year 2010/ 09, while Morrisons to 11.6% from 11.3% through the same period (Euromonitor, 2010). Sainsbury has to come out new ideas to cope with the high competitive pressure in order to overcome the threats from other big competitors.
The Bargaining Power of Buyers-Buyers is one of the keys that affect an industry because of their ability to force down prices, bargain for higher quality or move services, and play competitors against each other. In cases where products have a slight differentiation and are more standardised, the switching cost is very low and the buyers can easily switch from one brand to another. Customers are easily attracted towards low prices of a product. Besides, with the availability of online retail shopping, the prices of products are easily compared and thus selected. Hence, the bargaining power of customer is a threat to an industry or Sainsbury (John Thompson, 2010).
The Threat of the Entry of New Competitors-New entrants to an industry typically bring to it new capacity, a desire to gain market share, and substantial resources which are threats to an established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. An entry barrier is an obstruction that makes it difficult for a company to enter an industry. The threat of entry of new competitors into the food retail industry is low as it requires huge capital investments in order to be competitive and to establish a brand name.
Major brands that have already captured the food retail market are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010). Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value.
The Threat of Substitute Products or Services-A substitute product is a product that appears to be different but can satisfy the same need as another product.
2.5 Strategy Analytical Methods for Internal Environment (Micro-Environment)
Value Chain Analysis defines as the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Michael Porter suggested that the activities of a business could be grouped under two headings which are Primary and Supported Activities. Primary activities are activities that directly create and deliver a product whereas support activities are not directly involved in production and it may increase effectiveness or efficiency of the production. On the primary activities are inbound logistics, operations, outbound logistics, marketing and sales and service. On the other hand, supported activities include procurement, human resource management, technology development and Firm Infrastructure. (Anthony Henry, 2008). Value Chain Analysis is one way of identifying which activities are the strengths or weaknesses of the organization.
2.5.1 Operations of Primary Activities
These are the activities related to the production of products and services. This section can be split into departments in certain companies. For instances, the operations in case of a Sainsbury would include information counter, services counter and cashier.
After operating without a third-party inventory auditor for ten years, Sainsbury’s retailers lacked a sound process for ensuring that accurate counts of product were recorded. The absence of a reliable system prevented Sainsbury’s from accurately measuring its inventory, thereby limiting their ability to control product shrinkage. This, in turn, led to lower earnings. Also present was the reluctance by store personnel to change store procedures and accept responsibility for accurate store reporting. This ends up becoming weaknesses to Sainsbury’s operation. (RGIS, 2010)
2.5.2 Outbound Logistics of Primary Activities
Outbound logistics are activities that distributing the final product or services to the customers. (David Cambell)
Product availability is now the best it has been for years. The depot network has been successfully reorganised to continue to improve service to stores. With the increase in sales, the depots now handle over a million more cases and improved efficiencies have also reduced the cost per case. A new distribution centre in Northampton ensures there is enough capacity to match growth expectations and creating 750 new jobs. This strength of the organization has not only improved efficiency to the consumer and also provided jobs for the people (J-Sainsbury.co.uk, 2007)
2.6 Human Resource Management of Supported Activities
Human resource management involves with recruiting, training, motivating and rewarding the workforce of the company. Human resources management is important to a company’s operation nowadays as it is a way of attaining sustainable competitive advantage. In the case of Sainsbury, colleagues are the key to the company’s success and over the past year leadership training to 9000 managers throughout the business was completed. Sainsbury learned how to engage with its colleagues with its goals and values through their “talkback” survey and last year had marked improvements in both colleague engagement and its leadership skills. As for that, Sainsbury has a good profile for treating its staff professionally so that this strength of it can recruit staff even easily.
After analysed the Strength and Weaknesses and Opportunity and Threats by using Strategic Analytical tools, the next step is Strategy Formulation. With the analysis result are collected, to formulate changes has to base on the analysed results in order to change accordingly.
3.0 Strategy Formulation
Ron Meyer (2004) describes strategy formulation as the development of long range plans for the effective management of environmental opportunities and threats in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines.
3.1 Strategies
M. Thenmozhi (2001) concludes that a strategy of a corporation forms a comprehensive master plan stating how the corporation will achieve its mission and objectives. There are different types of strategy and the typical business firm will considers three types of strategy which are corporate, business and functional strategies.
3.2 Corporate Strategy
It describes a company’s overall direction in terms of its general attitude towards growth and management of its various business and product lines. Corporate strategy deals with three key issues facing the corporation as a whole.
3.2.1 Directional strategy
It is the firm’s overall orientation towards growth, stability and retrenchment.
Growth Strategies-Expanding a company’s activities to increase sales or to take advantage to reduce the per-unit cost of products sold which increase profits. There are two basic growth strategies which are concentration and diversification.
Concentration-Concentrate or work closely on the product line that contribute growth or profitable to the organization. The two basic concentration strategies are vertical growth and horizontal growth.
Diversification-A company chooses to diversify to seek to increase profitability through greater sales volume obtained from new products and new markets. The three basic diversification strategies are concentric, horizontal and conglomerate. In the case of Sainsbury, Sainsbury has diversified into new market of Sainsbury’s Bank in 1997. This is a joint venture with Bank of Scotland into a new segment of market. (Encyclopedia.com, 2001)
Stability- Anthony Henry (2008) notes that an organization can continue its current activities without any significant change in direction. Some of the more popular of these strategies are the pause/proceed-with-caution, no-change and profit strategies.
Pause/Proceed-With-Caution-This is an opportunity to rest before continuing a growth or retrenchment strategy. It is a very deliberate attempt to make only incremental improvements until a particular environmental situation changes.
No-Change Strategy-No change strategy is a decision to do nothing new, it is a choice to continue current operations and policies for the foreseeable future.
Profit Strategy-A profit strategy is a decision to do nothing new in a worsening situation but instead to act as though the company’s problems are only temporary. The profit strategy is an attempt to artificially support profits when a company’s sales are declining by reducing investment and short-term discretionary expenditures.
Retrenchment Strategies-Thomas L. Wheelen (2006) suggests that companies that are facing declining sales or making losses can imply retrenchment strategy to eliminate the weaknesses that are dragging the company down. Management may follow one of the several retrenchment strategies such as turnaround, becoming a captive company to selling out, bankruptcy or liquidation.
Turnaround Strategy-Emphasizes the improvement of operational efficiency and is probably most appropriate when a corporation’s problems are pervasive but not yet critical. A poorly performing firm is able to improve its performance by cutting costs and expenses and by selling assets. There are two types of turnaround strategy which are contraction and consolidation. Sainsbury lost its position as Britain’s second largest supermarket retailer to Wal-Mart’s Asda as the sales volume had dropped. Sainsbury’s Cheif Exceutive planned to cut out £900m of costs to improve its performance. (Richard Fletcher, 2003)
Captive Company Strategy-Captive company strategy involves giving up independence in exchange for security. A company with a weak competitive position may not be able to engage in a full-blown turnaround strategy. The industry may not be sufficiently attractive to justify such an effort from either the current management or investors.
Sell Out-If a corporation with a weak competitive position in an industry is unable either to pull itself up by its bootstraps or to find a customer to which it can become a captive company, it may have no choice but to sell out.
Bankruptcy and Liquidation Strategy-When a company is in a poor competitive situation, there are no one is interested to buy a weak company in an unattractive industry. Hence, the firm must pursue a bankruptcy or liquidation strategy. Bankruptcy involves giving up management of the firm to the courts in return for some settlement of the corporation’s obligations. In contrast to bankruptcy, which seeks to perpetuate a corporation, liquidation is the termination of a firm.
3.2.2 Portfolio Analysis
Top management views its product lines and business units as a series of portfolio investment and constantly keep analyzing for a profitable return. Two of the most popular strategies are the BCG Growth Share Matrix and GE Matrix.
BCG or Boston Consulting Group Growth-Share Matrix ( Picture refers to Appendix A)
BCG-Share Matrix is a management tool that serves four distinct purposes, it can be used to classify product portfolio in four business types based on four graphic labels including Stars, Cash Cows, Question Marks and Dogs. Besides, it can be used to determine what priorities should be given in the product portfolio of a company. Thirdly, it can classify an organisation’s product portfolio according to their cash usage and generation. Lastly, it offers management available strategies to tackle various product lines. (Tripod.com)
Cash Cows-Are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business.
Dogs-Are units with low market share in a mature, slow-growing industry. These units typically “break even”, generating barely enough cash to maintain the business’s market share.
Question Marks-This section are growing rapidly and consume large amount of cash, but because of the low market shares they do not generate much cash this results large net cash consumption.
Stars-Are units with a high market share in a fast-growing industry.
3.2.3 Parenting Strategy
It views a corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units. Corporate parenting generates corporate strategy by focusing on the core competencies of the parent corporation and on the value created from the relationship between the parent and its business.
3.3 Business Strategy
Christina Crowe (2010) describes that Business strategy is to strengthen a particular business so that its performance increases and the business are more profitable. It improves the competitive position of the corporation’s products or services in the specific industry or marketing segment. Michael Porter developed Generic strategies which consist of cost leadership, differentiation and focus.
3.3.1 Generic Strategy (Picture refer to Appendix B)
Cost Leadership-It is emphasizing efficiency, cost reduction is necessary in all aspects of the business. It has to produce high volume of standardized products to take the advantage of economies of scales and experience curve effects. The product is often a basic no-frills product which is low cost and made available to a very large customer base. It will be profitable as the product is much cheaper to produce.
China domestic retail industry faced fierce competition from foreign-funded retail enterprises, hence, China used to the Cost Leadership Strategy to gained back the competition.(EngHi138, 2006)
Differentiation-Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin.
Focus or Niche Strategy-Organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. (MarketingTeacher.com, 2000)
3.4 Functional Strategy
It is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing nurturing a distinctive competence to provide a company or business unit with a competitive advantage.
A hierarchy of strategy is the grouping of strategy types by levels in the organization. This hierarchy of strategy is a nesting of one strategy within another so that they complement and support one another. Functional strategies support business strategies that in turn support the corporate strategy (John A. Pearce, 2011,p288)
3.5 Strategy Evaluation
Anthony Henry (2008) mentions that Suitability, feasibility and acceptability can help managers to be explicit about any assumptions that may underpin their strategies.
3.5.1 Suitability-the plan or the changes are suitable or not to the organisation which help the organisation to overcome difficulties or help the organisation to improve.
An organisation will be concerned to evaluate how well the strategy matches the needs identified within its strategic analysis. There should be some consistency between the strategy, the opportunities within the external environment, the resources and capabilities of the organisation, and the organisational objectives (Juha Kettunen)
3.5.2 Feasibility-Concerns whether a strategy will work in practice. An organisation must ensure that it possesses the necessary resources and capabilities, such as finance, technological expertise, marketing, and other factors necessary to implement the strategy.
3.5.3 Acceptability- This criterion of acceptability addresses the response of stakeholders to the proposed strategy. Clearly, if a strategic change is to be implemented, it must have the support of those who will be most affected by it.
In a nutshell, after completed the strategy formulation, the next is to sets the stage of strategy implementation. Implementation is usually considered after strategy has been formulated, implementation is a key part of strategic management.
4.0 Strategy Implementation
The last section of strategy management is often called the action phase as Kyra Bartolomei (2010) defines Strategy Implementation as the process of allocating resources to support the chosen strategies to generate positive outcomes which can achieve the organizational goals.
Pierce and Robinson say that “to effectively direct and control the use of the firm’s resources, mechanisms such as organizational structure, information systems, leadership styles, assignment of key managers, budgeting, rewards and control systems are essential strategy implementation ingredients”
4.1 Organisational Structure
Shane Thornton (2011) points out that organizational structure are formal systems of relationships that exist within a business. Organizational structures allow management to monitor and control the business process while facilitating working relationships among employees from top to bottom. Different types of organizational structures include functional structure, divisional structure, matrix structure, hierarchical or tall structure, and horizontal or flat structure. However, functional and divisional structures are commonly used by retail industry as
Tesco organisation structure is functional structure as it has different department to serve different tasks which allows its employees to see easily who is in charge of each
department or who their department manager is (123HelpMe.com). On the other hand, Asda used both divisional and functional structures. The functional structure of Asda consist of few departments and the main department is the customer service department as Asda is more concerns about customer service which they think it is extremely important that a business gives 100% at all times to the customer because there are only one chance with a customer and if the customer is not impressed with the service they received, they will not return and also will spread bad comments about Asda. As for the Divisional Structure of Asda, it has the Executive Committee, Editorial Board, Council Chairs, ASDA Board of Trustees and ASDA House of Delegates (Asda.net.org).
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Functional Structure-Donna G. Morton (2011) explained that functional structure is differs from a divisional or product structure, which typically distinguishes its units by product type or geographical region and allows leaders within each unit more control. This means that dividing the tasks into functional specialties to enables the personnel of the firms to concentrate on only one aspect of the necessary work. The functional structure was designed on the concept that high specialization and high control yields high efficiency.
The organisation structure used by Sainsbury is the Functional Structure as Sainsbury has different department such as IT department and purchasing department. The IT department is more focus on efficiency system to customer and the purchasing department is to deliver in time and efficient. The purchasing department was previously complex and was then control by Lawrence Christensen who joined in September and restructuring including the recruitment of new members to the management team. (J-sainsbury.co.uk)
Divisional Structure-Audra Bianca (2009) defines divisional organizational structure as breaks the public, private or non-profit firm into a series of semi-autonomous units. Each division has its own chief officer who is responsible for the performance of the division. Organizations must decide how to organize parts of the firm according to characteristics like function, geographic location or products.
4.2 Strategy Leadership
Organisational leadership is to guiding and shepherding towards a vision over time and developing growth and success to an organisation (John A. Pearce, 2011, p326 ). Leaders galvanize commitment to embrace change through three interrelated activities which are clarifying strategic intent, building and organisation and shaping organisational culture.
4.2.1 Clarifying Strategy Intent
Clarifying Strategy Intent is a clear sense of where they want to lead the company and what results they expect to achieve. To clarify Strategic Intent, organisation has to simultaneously concentrate and focus on the vision and performance (John A. Pearce, 2011, p328).
Vision-A leader has to communicate clearly and directly a fundamental vision of what the business needs to become.
Performance-Clarifying strategic intent must also ensure the survival of the enterprise as it pursues a well articulated vision, and after it reaches the vision. So a key element of good organisational leadership is to make clear the performance expectations a leader has for the organisation, and mangers in it, as they seek to move toward that vision.
Alex Blyth (2007) reported that the arrival of Justin King as the new CEO of Sainsbury which created a new approach, Sainsbury’s began its leadership programme in October 2004. Straight away, the HR team undertook a major communications exercise to spread these values throughout the business. Sainsbury’s last audited set of financial results, which it reported in November 2006, are testament to the success of the leadership programme. The company enjoyed half-year sales growth of 8.3%, and a 60% leap in profits to £189m. Internal measures have also shown the programme was well received. The company’s monthly staff opinion survey has shown a 10% rise in the indices that measure employee engagement and leadership capability over the past 12 months. The leadership programme has been a significant factor in this recent improvement in the company’s fortunes.
4.2.2 Building an Organisation
Thomas L. Wheelen (2008) mentions that leaders spend considerable time shaping and refining their organisational structure and making it function effectively to accomplish strategic intent. Leaders have to rebuilding, remaking or create new strategy for the organisation to align with the ever-changing environment. However, there are overcoming resistance while making any changes which leaders find themselves facing problems while attempt to rebuild the organisation. Leaders can overcome with the problems with the help of education, perseverance and principle.
Education and Leadership Development-The effort to familiarize future leaders with the skills important to the company and to develop exceptional leaders among the managers employed.
Perseverance-Perseverance of a leader is the capacity to see a commitment through to completion long after most people would have stopped trying.
Principle-A leader’s fundamental personal standards that guide her sense of honesty, integrity, and ethical behaviour.
4.2.3 Shaping Organisational Culture
Leaders u
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