Competition between Loblaw and Wal-Mart - Essay Example

?INTRODUCTION TO THE SCENARIO: Loblaw was considered to be the North America’s most innovative retail chains. It is one of the holding companies of the Weston family of Canada. This family has been a major actor or element in the global food industry. It has investments in this industry which are spanning across the world. The family has companies in its portfolio, whose products are consumed by the British Royal family. This makes the family name synonymous to royalty. Loblaw which is one of the flagship companies of this family is currently under a very dire situation. Its initiative of Real Canadian Super Stores has been a major flop and as a result of that has caused enormous amount of loses not only for the family but also for the retail chain. The Executive Chairman of the company is Galen Weston who at the time of the launching of these stores was just five month into the new position. He succeeded his father W. Galen Weston. The Executive Chairman is in a very demanding place at the moment. He not only has to flip the tables for the company but also has to save the family’s reputation. He supporting executives have let him down very badly with awfully wrong recommendations, now he has taken the reins of the organisational strategy in his own hands. He believes that he can turn the fortune of the company around because according to him the company has been through much more difficult times than this and it has always managed to crawl back up. And there is no reason to believe that the company would not do the same now when it faces a similar crisis situation (Besanko, Dranove, Shanley, and Schaefer, 2007). BARRIERS TO ENTRY: Barriers to entry are placed by an existing business of an industry in the industry to discourage other interested entrant from entering the industry (Ferguson and Ferguson, 1994). The existing business can discourage a new entrant in a number of ways, for instance its can fabricate certain situations in the industry which would require a new entrant to put up huge capital investment before entering the industry (Leamer, 2009). The existing business can also put up a show of its strong brand equity in the marketplace, which can also discourage a new entrant from entering (Barthwal, 2000). Michael E. Porter (2008), while analysing the competitive environment of an industry identified six entry barriers: 1. Economies of scale: This occurs when unit price of a product decreases when a certain level of production volume is reached by a business (Mankiw, 2009). When existing players in the industry gain this advantage they force the new entrant to either find a competitive production volume or bear the high unit cost. Other similar cost advantages which the existing player would have on his side include: proprietary information, favourable location, experience, excess to raw material, government subsidies and etc (Arnold, 2008). 2. Product Differentiation: Since existing businesses in an industry have an established brand equity and identity, this fact makes it important for new entrant to come up with a different product. In this regard the new entrant has to invest a lot of resources, which can be very discouraging for him (Wessels, 2000). 3. Capital Requirement: This is a requirement which comes up when new entrant wants to enter an industry. They have to commit huge amount of capital to acquire operational status (Johnson & Scholes 2001). 4. Switching Cost: This cost has to deal with customers, who have to bear this cost when they switch to a different provider of the same product. Certain industries have a very high switching cost which makes it important for the new entrant to offer customers some relief or incentives so that the customers find some motivation to switch (Borodzicz, 2005). 5. Access to Distribution Channels: In an industry the established players have a dominating position when it comes to influencing the members of distribution channels. Through long standing relationship agreements an established business erects a hurdle for a new entrant, who has to offer additional incentives to engage distribution channels. Such incentives include price discount, cooperative advertisements and etc (Johnson & Scholes, 2001). 6. Government policy: Many government regulations can discourage a new entrant from entering the industry. These regulations can be in the form of environmental regulation, import policies, licensing requirement and etc (Johnson & Scholes, 2001). All these barriers can be very hard to cross for a new entrant; thereby they can prove to be very discouraging for the new entrant. Moreover, these barriers can significantly shift the competitive landscape in favour of established businesses. LOBLAW VERSUS WAL-MART: Loblaw’s through their Real Canadian Super Stores model tried to implement the “First Movers Advantage” strategy in the retail industry. This strategy was augmented by product differentiation and cost curtailing strategies. All and all Loblaw’s through these strategies tried to create entry barriers for Wall-Mart’s superstore business model. Loblaw’s was so hard bent on preventing Wall-Mart from initialising its superstore model that it set aside $1.4 billion for its own Real Canadian Super Stores. This capital was used to acquire favourable spots for its superstore, undertake a huge marketing campaign, create appealing in store ambience and have tremendous amount of product assortments. Loblaw also struck a deal with the United Food and Commercial Workers (UFCW) Union to reduce its store workers wage rate, so that they could reduce their operation expenditure. From the above mentioned initiatives it is pretty much obvious that Loblaw wanted to created entry barriers for Wall-Marts superstores using the competitive strategies like low-cost leadership, product differentiation and most importantly by being a first mover in to this retain store segment (Besanko, Dranove, Shanley, and Schaefer, 2007). Having been successful in setting up such stiff barriers, Loblaw shifted the competitive standards in favour of itself. Now if Wall-Mart wanted to initiate its superstore model, it will have to strike a deal with UFCW, allowing it to offer even lower wage rates to its in store employees than Loblaw. But this kind of deal would be very difficult to muster for Wall-mart because UFCW would be having their own limitations; going beyond those limitations would harm UFCW’s image. Loblaw through their deal with UFCW have set a new lower lock in the wage rates, going beyond this lower lock would be not be possible for Wall-Mart. Loblaw’s product differentiation scheme has also set a new benchmark in the super-store segment, Wall-Mart would have to come up with a totally amazing and astonishing product differentiation scheme to overtake Loblaw in this competitive parameter. Loblaw has also taken attractive spots for its RCSS; Wall-Mart again will have to take extra money out of its pockets to acquire competitive real estate. To even match the efforts of Loblaw, Wall-Mart will have to undertake a capital expenditure which is exceeding $1.4 billion committed by Loblaw in this segment. This amount of expenditure will take the break-even point of Wall-Mart’s investment even further than that of Loblaw (Besanko, Dranove, Shanley, and Schaefer, 2007). However, according to the recent retail industry news Loblaw’s move into the super store segment has brought devastating results for the company. Not only has the company been losing enormous amount of money on its investment but also it has lost its earlier market share to competitors. Industry analysts have deemed Loblaw’s strategic move as ineffective and counterproductive. They further call this move as one that has played the company into the hands of Wall-Mart and other competitors. According to the industry analysts, the company has seriously damaged its previous image of being the food industry leaders. The company by adopting the superstore model was considered more like Wall-Mart. Rather than adding more value into the brand equity of Loblaw, this moving added value into the brand equity of Wall-Mart and other competitors. The situation faced by Loblaw as a result of switching to the super store model in totally beyond comprehension. The stores faced inventory shortages, the aisles were found to be out of stock and the warehouses were overflow with inventory. The entire operations of the company received severe setbacks making the situation implausible. All the initiatives which were considered by the company as differentiating it from Wall-Mart were actually making the company’s stores resemble more with Wall-mart’s stores (Strauss, 2007). Due to the magnitude of the failure, the company has been continuously incurring monetary losses along with the deterioration of its image. Even then, the current Executive Chairman, Galen Weston, is looking very optimistic about turning the tables. He has proclaimed that the company will revert back to its previous core competencies and try to play according to its strengths. Galen Weston comes from a long heritage of family members who have literally played a major role in developing the current face of the food industry. He has a mammoth task up ahead, not only does he have to work out a new strategy for Loblaw which will ensure its survival and enable it regain its previous dominion in the marketplace, but also he has to salvage his family’s pride which under the circumstance is going down the drain. CONCLUSION: In this case it can be seen that no entry barrier can prove to be absolute. Sometimes certain entry barriers can become harmful for the company which is erecting these barriers. This exactly has happened with Loblaw, the entry barriers erected by it for Wall-Mart have actually proved to be damaging for the Loblaw itself. Bibliography and List of References Arnold, R 2008, Economics, South-Western Cengage Learning: Mason, OH. Barthwal, R 2000, Industrial Economics. New Age International, New-Delhi. Besanko, D., Dranove, D., Shanley, M., and Schaefer, S 2007, Economics of Strategy. John Wiley and Sons, Hoboken. Borodzicz, E 2005, Risk, Crisis and Security Management, Wiley: New York. Ferguson, R., and Ferguson, G 1994, Industrial Economics. New York University Press, New York. Johnson, G., & Scholes K 2001, Exploring Corporate Strategy: Text and Cases. 6edition, Prentice-Hall: London. Leamer, E 2009, Macroeconomic Patterns and Stories, Springer – Verlag Berlin Heidelberg, Heidelberg. Mankiw, G 2009, Principles of Economics. South-Western Cengage Learning, , Mason, OH. Porter, M 2008, ‘The Five Competitive Forces that Shape Strategy.’ Harvard Business Review. Strauss, M 2007, Loblaw takes aim at rivals. Available from http://www.theglobeandmail.com/globe-investor/loblaw-takes-aim-at-rivals/article1463545/ [Accessed 20 April 2012] Wessels, W 2000, Economics, Barron’s Educational Series, New York. Read More