PEST Analysis of Woolworths Holdings Limited - Case Study Example

Proposing Strategy; Case Study Client Inserts His/her Name Client Inserts Grade Course Client Inserts Tutor’s Name 26/08/2012 INTRODUCTION Woolworths is one of the largest food retailers in Australia (Woolworths Holdings Limited [WHL] 2012). While dealing mainly in grocery products, Woolworths has over 3000 stores in major cities of Australia and employs more than 190 000 workers at different capacities (Steele 2012). It was opened first in Sydney in December 1924 with the name Woolworths Bazaar Limited; however, the middle name was later shed. By then, it was a small self-service store, one of the few kinds in Sydney. It is believed that it is for this reason that the first store received large numbers of customers of all ages than it was initially expected. This led to various innovations and expansions in the later years of its development. Originally set to operate within Australia, it has now extended its stores in some of the neighbouring countries including Tasmania, Western Samoa, Fiji and New Zealand (WHL 2012). However, there have been various challenges amidst developmental strategies. This study focuses on the factors that have affected the Woolworths Growth and later suggest strategies to develop the company even more in the future. The company’s current external environment has been analysed using the PEST and Porter’s Five Forces Model analyses. Internal conditions are looked into using a combination of SWOT [(primarily) Strengths-Weaknesses)] and Value Chain Analysis. A combination of the two analyses helps defining of the companies Threat-Opportunity index hand in hand with suggesting the possible strategies to involve for Woolworths sustenance and further development. The study finds out that Woolworths management have to reduce costs, provide various public services and fight to reduce selling prices to match those of major competitors such as the Cole-Myer, Franklins and Aldi Stores among others (WHL 2012). EXTERNAL ENVIRONMENT Macro Environment; PEST Analysis In the political scene, Australia, the immediate environment for Woolworths, is largely a democratic nation (Quick Guide to Australian Political Parties 2009). This means that most of the political decisions and/or public policies are highly influenced by the public (Quick Guide to Australian Political Parties 2009). Australia has two major political parties of almost equal abilities and/or popularity and therefore it is highly possible that there may be political overhaul (Quick Guide to Australian Political Parties 2009). However, in the business context, this has no major effects on corporate governance and policy (Steele 2012). The corporate policies are rarely are rarely changed and the Australian government has been in the fore front in promoting business development and especially investors from within and from external environments. Besides, Woolworths is a member of the Australian Retailers Association (ARA) which plays a great role in the control of the processes of policy making and especially where business policies are concerned (Woolworths Limited 2010). Australian population gradually increases every year and this makes the market for the mandatory grocery products widen (Australian Bureau of Statistics 2005). Together with absolutely high demand of the grocery products per household, grocery industry promises even greener grounds for new and the prevailing investments. For this reason, Woolworth which occupies more than 35% of the market share has a promisingly long life cycle as the grocery industry does (Woolworths Limited 2010). The consumers in the grocery industry vary from old and young folks (Woolworths 2011). Such an opportunity is worth exploitation, as the management observes. Yet, there have been various impeding factors making the processes of strategy development to be reviewed severally and per region (WHL 2012). This is due the prevalence of a wide range of environmental (climatic) variations. Most of Australian regions suffer from severe dry climatic episodes (Australian Bureau of Statistics 2005). However, the Australian government has been on the front line to promote Agricultural sector. With urbanisation leading as the major cause of high dependency on readily manufactured food products, many food retailers have flocked Australian urban centres and thus offer stiff competition. Challenges include the low prices for similar quality products offered by similar firms such as the rapidly growing Aldi stores, the Cole-Myer and the Franklins (Woolworths Limited 2010). However, the well-crafted Woolworths’ name has led to loyalty by its customers as a home grown company, aided by the trade slogan ‘The Fresh Food People’. According to Jacenko (2005), any retail business is largely affected by the influx indices of the customers. Australian society can be described as financially stable, although around 60% of immediate community shows low willingness to spend due to high cost of living from other non-food requirements (WHL 2012). A good example is the escalating prices of petroleum products that not only affect companies, but also individual natives economically. Coupled with the, on average, low-paying Australian wages and the community does not exhibit high buying power mainly in terms of the number of goods bought per purchase. However, Colioris (2005) recounts that the currently low housing rates have been the stabilizing factor in the reduction of costs of living. Woolworths started using computer technology in 1984 (WHL 2012). Surrounded by highly mushrooming technological options in various fields, the company’s life has been favoured greatly in terms of ease of transactions, marketing and administration (Steele 2012). With the major technological growth occurring in the late 1990s and the 21st century, the company stands chances to expand and develop easily (Woolworths 2012). The company’s executives have been able to control operations of the business from Sydney, by the virtue of highly improved coordination as aided by the highly sophisticated 21st century technology (Steele 2012; Woolworths 2012). Porter’s Five Forces The bargaining power of the consumer is one factor not to forget in this context. Except for the loyal customers, Woolworths literally faces a challenge in attracting new customers who are delicate and who meander with the low prices. A good example of a competitive company that offers low prices is Aldi Supermarkets. Consumer’s bargaining power is realized when the flux of the customers changes. Woolworths, despite this factor, it does not offer direct bargaining benches nor does it give discounts and therefore the bargaining power of the consumer can only be traced from the deflating customer influx indices (WHL 2012). According to Jacenko (2005), the growth margin of newer companies like Aldi is much larger than that of Woolworths and therefore the difference thereof is worth thought. Suppliers do not necessarily possess high bargaining powers. Occurring mainly as manufacturers, they delight at the availability of a larger buyer (like Woolworths) and therefore for loyalty reasons and mutual trust, the manufacturers do not offer pressure on the subject of prices. Woolworths, also recently operating as a wholesaler, is honoured with low prices for the bulk purchases it makes. The suppliers’ bargaining power can therefore be estimated at low rates as far as Woolworth’s management team is concerned. Besides, the high competitive advantage makes key suppliers to Woolworths fight to retain their call. For Woolworths, there is no much fear of new entrants in the market (Woolworths 2012). The government encourages new investments to make the economy as busy as possible. Therefore there may be new entrants into the market what with the free market system in Australia and the widening of the potentials of grocery industry fuelled by the growing urbanization. Woolworths provides almost every brand in the Grocery brackets more than any other food retailers in Australia (Colioris 2005). Therefore, it stands at safe grounds in this context and considers the new entrants a smaller threat in comparison to the prevailing competition. Woolworths (2011) classifies Australia as the leading country in terms of concentration of retail stores. For Woolworths, there are several major competitors. The leading ones, as reiterated above, are Cole-Myer, the Franklins and Aldi Supermarkets (Colioris 2005). Their strategies have been reduction of prices such that many a times, Woolworth’s prices for similar commodities have been constantly higher (Steele 2012). The threat of substitute does not exactly exist. Initially, there existed different branding of fast foods especially from McDonalds’ fast foods (Woolworths 2011) but since Woolworths started selling all those brands, there have not been as much threats. INTERNAL ANALYSIS (FIRM ANALYSIS) Core Competence and Competitive Advantage The management of Woolworths takes hierarchical mode. The Chief Executive Officer’s (currently, the Operational Managing Director) office is in Sydney, from where various other junior management teams deployed in different parts of Australia and other countries such as New Zealand among others are controlled (Colioris 2005). Employees are highly motivated by promissory career development and capacity building culture of Woolworths Limited (Woolworths Limited 2010). A good example is that the executive offices of the company are occupied by personalities selected from the Woolworths workforce. Employees usually feel secure on these terms and are many such that the working is made easier. The company’s trade slogan of ‘the Fresh Food People’ constitutes one missionary approach that maintains operational and individual discipline of employees on various aspects at high levels (Jacenko 2005). The fact that Woolworths owns the highest market potion has a higher competitive advantage in terms of net sales and thus a high financial foundation (Colioris 2005). Woolworths is a home grown company and the managerial team has ample knowledge on what such businesses require on the ground that they do foreign investors. Value Chain Analysis Inbound logistics The Woolworths management specializes in employing larger number of employees than the other similar companies but offer relatively lower wages. On average, Woolworths incurs more cost than other companies in employees’ payments on relative basis (Steele 2012). In a typical store, Woolworths uses a minimum of 10 employees in comparison, for example, to Aldi’s maximum of 4 employees per store. Every supermarket outlet is tagged with a storage where suppliers drop unpackaged foodstuffs and/or packaged bulks (Colioris 2005). There is a smooth and open internal communication route; it has become much easier for a regular store manager to communicate directly with the senior management officials at any time (Jacenko 2005). Therefore, realized problems are easily solved and at a fast rate. Supportive activities The senior management team offers training services to employees in forms of seminars arranged for improvement of hospitality to customers at any time as well as managerial training. This serves as a key motivational quality of Woolworth’s atmosphere. The advisory staffs though initially appointed from those outside the management is later changed to intellectuals from within the management crew what with the experience and training so obtained (Woolworths Limited 2010). The suppliers are never paid for transport services, but rather are required to distribute their products freely as an off-counter service (Horton 2008). The constant opening of new stores in various urban centres is as a result of demands from the public and the dire need for further expansion. This is aided by prior advertisement to prepare potential market base. SWOT Analysis The high competitive advantage, a combination of well-established name of Woolworths Limited, ability to provide all varieties of foodstuffs to the ever rising market demand and loyalty from old customer base, gives the company high confidence levels. These constitute the major strengths. Still, the company has prioritized improvement of employees’ capacity to operate the business at different levels through career growth and/or capacity building (Horton 2008). The highly experienced staff members picked selectively from the company’s workforce increase internal trust levels. Essentially, a motivated worker produces more produces more and this is what the management of Woolworth have fought hard to get to (Horton 2008). Woolworths provides not only retail services, but wholesale services. This makes smaller retailers and local shopping malls to directly buy from Woolworths on wholesale terms and this counters greatly the threat of new entrants into the market. Woolworth daily net sales are high and this offers the company an upper hand in terms of capital base for construction and expansion into other potential sites (Woolworths 2011). The major weaknesses are mainly those that are likely to cause adversities in the near future. As the current generation specializes in ensuring their rights are realized, the issue of loyalty of consumers may be broken down gradually as the other companies offer similar quality products at relatively lower prices (Horton 2008). This is in view of the escalating cost of living. Bagging services are only offered at a cost to the consumer while this is intended to control environmental health (Jacenko 2005). Better an argument as it is, this may lead to lower customer influx per time/day, as most customers prefer wherever such services are offered for free. Employment of relatively larger numbers of employees leads to incurring of more operational costs. While compared with other companies that operate on fewer-employees-high-wages strategy, Woolworths incurs more operational costs. This is the main reason as to why Woolworths’ commodity prices stand higher most of the time in a year. STRATEGY PROPOSAL AND OPPORTUNITIES From since 1924, Woolworths’ call has been to ensure high quality and proper health to the consumers as well as the environments (Woolworths Limited 2010). The PEST analysis above, in summary, indicates that Woolworths faces zero political threat. In the meantime, it is being favoured by ever flourishing Grocery industry with low fear of substitutes in the market, plus the ever growing urbanization that increases the market potential daily. Therefore Woolworths stands better grounds for expansion into other potential areas. Major problems appear to be concentrated in the internal segment. The issue of relatively higher prices for similar commodities may prove a danger in the future while the presumably loyal customers are continuously displaced by new and dynamic customers who are generally inconsiderate and volatile. For larger companies, the larger the customer base, the larger the potential for massive losses in case the worst happens. Therefore, there is always a need to maintain current operational trends at best while reducing threat loopholes and closing loose gaps in the management. The best strategy would be to find for a way to minimize costs to search and woo more reliable suppliers to solve the problem of high prices and fear of the unknown in case of expansion into new operational site respectively. To reduce costs of production, a major step would be to buy operational sites so as to avoid tenancy costs. Owning operational sites offers freedom and flexibility in terms of land use and often offers ample land space for construction of various structures. Convenience is as well granted. For example, the creation of warehouses in the backyard of a particular store in more convenient than renting a warehouse which must not necessarily is close to the supermarkets. This eases processes such as packaging and branding while reducing rental costs altogether. The company may also avoid some allowances such as transport of workers and housing allowances by building permanent servant quarters around. This will prepare the company to reduce on-shelf commodity prices that appeals consumers. The issue of the high number of workers is delicate. If the numbers are reduced suddenly, there may be no accomplishment of various vital roles. Besides, there is no power and capacity to anyhow fire employees without proper reasons. However, the strategy ‘plan B’ can be to gradually reduce the number of employees as the company opens newer stores. Meanwhile, the employees may be trained how to multitask given various utilities or resources. For example, the surveillance issue can be left to cameras only with one controller. A billboard maybe fitted within strategic points within the stores to direct customers to various commodities. The resources must be provided further to enhance such a project. After training has been perfectly achieved, smaller groups of workers may be detached from old stores and be deployed in the new store without employing new workforce. However, increasing workload per person means increasing salaries. Increase of salaries will be done in measures that ensure the original payment figure is reduced. Multitasking strategy has been used, for example by Aldi Stores, and has proven more economical. The major fight is to ensure that Woolworths maintains high quality while ensuring lower prices that will even attract volatile customers in the future. Woolworths can as well seek ways to enter the production chapter as manufacturers of their own commodities. With the high financial or capital base (WHL 2012), the feasibility of this strategy can be an option. However, for the fear of loss of quality and unknown behaviour of the consumers with change of manufacturers branding, this project can be far too risky. However, everything has a start and basing on the entrepreneurial renowned audacity and partially imagined confidence, the success of such a project can be achieved. The company may in the long run be able to reduce prices to lower level than the other competitors. However, maintenance of the current conditions is crucial and only introduces new innovative and developmental projects into the operating system of the company in question. For example, new branding of similar quality to those of the trusted supplier must be introduced wisely. Consumer behaviour tends to sway easily with the colours and other physical appearance traits. At the same time, this project may lead to unprecedented costs that must be recovered by increasing customer base and trust by increasing further the competitive advantage of Woolworths Limited. CONCLUSION Woolworths is one of the leading food retailers, home grown firm, in Australia. It possesses more that 35% of food retail market share. It is also the food retail firm with the highest daily sales. Woolworth’s services are felt in various countries neighbour to Australia. However, there exist threats that are currently not as harmful as they can potentially become in the near future. The major foreseeable problem is constant higher prices for on-shelf commodities in comparison to other similar companies such as Aldi supermarkets. It is worthwhile to say that permanence of customers’ loyalty and trust can only, at its best, be hypothetical and therefore to prepare for smooth running of the company in the future and promising exponential growth (Steele 2012), the strategy is to reduce prices, but cautiously. First, to fight to possess operational sites can easily tenancy costs. Secondly, reduction of the number of employees can be another strategy where small numbers of employees are expected to multitask and receive relatively higher wages. The third option can be to start manufacturing firms to produces similar goods but at lower costs of production and it can be performed whenever the above two strategies are impractical. The best condition would be when the three named interventional projects are successfully exercised simultaneously. The main idea being to reduce the prices and simultaneously maintain high quality of commodities and services, a combination of the three projects can prove possibility to achieve this goal. The Woolworths future depends on the nature of the strategy underway. It is more painful to be haunted by foreseen problems for which no remedial steps were taken (Steele 2012). List of References Australian Bureau of Statistics. 2005. National and state population summary table. (Cat. No. 4102.0) accessed on 24/08/2012 Colioris. 2005. An Overview of Woolworths Australia. Woolworths Australia. Pp4-61. Horton, p. 2008. Woolworths Limited. Public Submission to ACCC Grocery Inquiry 2008. Pp1-30. Jacenko, A. 2005. Australia’s Retail Food Sector: Some Preliminary Observations. The Pacific Food System Outlook 2005-06, Abare Conference Paper 05:11, pp2-9. Quick Guide to Australian Political Parties. 2009. Australian Political Parties. Accessed on 24/08/2012 Steele, R. 2012. Improved Functionality and Customer Experience Supports Growth of Online Business. Woolworths Australia’s Success Story. p1. Woolworths Holdings Limited (WHL). 2012. Economic Overview. Overview IAN MOIR, pp2-58. Woolworths Limited. 2010. Productivity Commission Performance Benchmarking of Australian Business Regulation: Planning, Zoning and Development Assessments. A Submission regarding Productivity Commission Performance Benchmarking of Australian Business Regulation: Planning, Zoning and Development Assessments 2010. Pp3-17. Woolworths. 2011. Economic Structure and Performance of the Australian Retail Industry. A Submission to the Productivity Commission Inquiry into the Economic Structure and Performance of the Australian Retail Industry. Pp2-18. Woolworths. 2012. Woolworths Supermarkets Australia. Swisslog. Pp1-4. Read More