John Lewis - Market Entry Strategy - Case Study Example

Word Count: 3998

Executive Summary

The report explores the external environmental factors affecting John Lewis, the company’s internal capabilities, culture, values and corporate social responsibility practices. It also examines the international business opportunities available for John Lewis and targets the UAE as a potential new market. External factors include taxation, industry regulations, economic changes; UK’s changing demographics and evolving shopping habits among others. There is intense competition among retail companies and many barriers to entry. John Lewis has a leading position in online trades and a strong customer base; however, it has few stores, low profit/returns ration, a narrow target market, and declining profits. The company should diversify its product range, open more stores, implement a sustainability plan, expand online retail operations, and reduce operating costs. There are opportunities for John Lewis in the EU, South America and Asia. These regions have organized retail markets, high populations and underserved markets. UAE is a suitable market because of its high per capita income, low unemployment, large proportion of expatriates and high level of urbanization. John Lewis will utilize a joint venture market entry strategy to reduce risks, provide ample resources, and settle into the market easily.

1.0 INTRODUCTION

John Lewis is a retail company that operates a number of department stores around the UK. The company was founded in 1864 by John Lewis with headquarters in London. The first department store was opened in Oxford Street in London and the company has expanded over the years with over 40 stores across various cities. As of 2016, John Lewis has a workforce of over 90,000 workers (JohnLewis, 2016). John Lewis has an ongoing partnership with Waitrose Supermarkets. The company retails a wide range of products including electronics, clothing, equipment, furniture, cosmetics, and toys. The mission of the company is to satisfy all its stakeholders through a successful business and satisfactory employment with the capacity to sustain and enhance its position in retail and to thrive as an employee owned business (JohnLewis, 2016).

2.0 COMPETITIVE POSITION IN THE EXTERNAL ENVIRONMENT.

2.1 PESTEL Analysis

Political Factors

John Lewis is required to adhere to policies related to governance and trading. The government regulates matters related to taxation and competition (Gov, 2015). The level of taxation imposed by the government can pose a challenge to the competitiveness of John Lewis. Recent increases in corporation taxes have had the effect of reducing the profit margins of companies operating in the retail sector (Ruddick, 2015). Other taxes paid by companies in the UK include value added tax (VAT), capital gains tax and stamp duty. In 2011, the VAT rate was increased from 17.5% to 20% on most items except domestic fuel, food, and children’s clothing (Gov, 2015). Rise in the VAT rate increases the prices of goods thereby discouraging consumer spending. Government regulations on competition influence issues related to mergers, partnerships and acquisitions.

Economic Factors

A number of economic downtimes have been experienced since the 2008 economic recession (Hill, Cronk, and Wickramasekera, 2013). The economic downtimes affect the economic growth of the country thereby reducing the purchasing power of UK citizens and shrinking disposable income. Moreover, consumers become more price sensitive, which compels them to buy products in lower price ranges. Economic downtimes have resulted in increased unemployment. Increased unemployment results in the reduced demand for goods and services. Economic uncertainly also restricts spending by consumers especially on luxury items.

Socio-Cultural Factors

Demographic changes have an effect on the retail industry because they alter demand for particular goods and services. The UK population is an ageing population because of increased life expectancy and reduced birth rates (Kirk, 2015). There has been an increase in the volumes of goods sold through online shopping indicating a shift in the consumer behaviour, which affects the operations of retail companies as they are forced to install e-commerce infrastructure. Consumers in the UK are taking a keener interest on matters relating to their health and safety (Jones, Comfort, and Hillier, 2007). The increased diversity of the UK requires retail companies to offer products that meet diverse needs and tastes of customers.

Technological Factors

Technology has become central in the operations of most businesses especially in the retail sector (Wrigley and Lowe, 2014). Increased use of computers and mobile devices has promoted online shopping. Consumers can to access information about the products they need and read reviews from other consumers. Changes in technology have necessitated John Lewis to utilize electronic funds transfer systems, and automated point of sale. Retail companies also utilize technology to gather information about customer satisfaction and behaviour. Changes in technology necessitate changes in advertising and promotional strategies.

Environmental Factors

The government, along with various environmental agencies, has compelled businesses to take more responsibility on issues of the environment. The population is also more concerned about issues relating to global warming and climate change. As such, companies are required to pursue sustainability as a way of reducing their impact on the planet. Businesses in the retail sector are obligated to reduce wastes, achieve energy efficiency and reduce environmental pollution (Wrigley and Lowe, 2014). The UK Environmental Agency penalizes companies that pollute the environment and customers may avoid such companies due to the poor reputation.

Legal Factors

The government passes consumer protection laws aimed at safeguarding the rights of consumers especially relating to sales and credit. The Consumer Protection for Unfair Trading Regulations Act was passed in 2008 (Gov, 2015). The Trade Descriptions Act compels retail companies to provide accurate and truthful information in advertisements. Companies are required to adhere to a number of trading standards established by regulatory bodies. Through the Health and Safety at Work Act, the company is required to ensure that the work environment is safe for both employees and customers (Jones, Comfort, and Hillier, 2007). The quest to fulfil the requirements of most legislations results in increased costs for John Lewis.

2.2 Porter’s Five Forces

Bargaining Power of Buyers

In the UK retail sector, buyers have high bargaining power. Consumers have high bargaining power because they can easily switch between competing companies with minimal switching costs. Consumers have many alternatives to choose from which further increases their bargaining power (Wrigley and Lowe, 2014). Consumers are powerful because technology has made it possible to access information about products and to compare prices between retailers.

Bargaining Power of Suppliers

The bargaining power of suppliers in the retail sector is low. John Lewis maintains power over suppliers because the company sells mostly its own branded commodities (JohnLewis, 2016). Suppliers have low bargaining power because they have to compete intensively to get retailers to stock their products. Suppliers are threatened by the capability of most retailers to source for products from countries that have cheaper goods. As such, major retail stores such as John Lewis can negotiate better deals for themselves thereby reducing costs and increasing profitability.

Threat of New Entrants

The threat of new entrants for John Lewis can be graded as low. The threat is low because of the high capital requirements and the high cost of establishing a distribution network is quite high (Wrigley and Lowe, 2014). The existing retail companies have exploited the economies of scale and can comfortably compete on pricing with new entrants. Established retail companies control a large percentage of the market share, which makes it difficult for new entrants to grow. New entrants are discouraged by the high fixed costs and expensive technological infrastructure requirements. New entrants are also discouraged by the fact that establishing brand reputation and visibility in the sector is costly.

Threat of Substitutes

The threat of substitutes is moderate. The growth of online retailers has increased the pressure on businesses that run department stores such as John Lewis. More online retailers increase the alternatives for consumers. However, John Lewis also provides online shopping capabilities. There is minimal threat of substitution for items such as clothing. The threat of substitution for commodities such as electronics and equipment is higher.

Competitive Rivalry

John Lewis faces intense competition from other retail companies in the sector. The department store chains that compete with John Lewis are House of Fraser, Marks and Spencer and Debenhams. Since John Lewis sells a wide range of products, the company is exposed to competition from the likes of Tesco, Sainsbury’s, and ASDA. On clothing and fashion items, the company competes with Marks and Spencer, Next, and Topshop. In terms of online retailing, John Lewis is the leader with over 41% of the online retail market, which is much higher than Marks and Spencer at 25% and Debenhams at 14% (Fioriti, 2014). Companies in the sector compete on pricing, varieties of commodities and product differentiation as a way of attracting customers and increasing market share. Companies have large quantities of information about consumers, which enables them to enhance their marketing strategies.

2.3 Summary of External Environment Analysis

Government policies and legislations on taxation, competition and fair trade affect the operations of retail companies. Economic downtimes and uncertainties affect demand, pricing, and profitability. Socio-cultural factors include the ageing population, changing shopping trends, and increasing diversity in the UK (Kirk, 2015). Increased use of computers and mobile devices has compelled retail companies to modify their operations. Retailers have to adhere to laws on environmental protection, consumer protection, health, safety, and fair trade. Buyers in the retail sector have high bargaining power because of low switching costs and many available alternatives. Suppliers have low bargaining power because they are saturated and some retailers sell their own branded products. The threat of new entrants is low because of the high capital investments, high fixed costs, and difficulty in attracting customers. The threat of substitution is moderate since some items are easily substituted while others have no alternatives. There exists an intense rivalry between John Lewis and other retail companies such as House of Fraser, Marks and Spencer, Debenhams, Tesco, Next, and ASDA.

2.4 Key Impact and Recommendations

Economic downtimes and uncertainties affect the profitability of John Lewis because consumers tend to spend less or buy lower priced goods. John Lewis can overcome this by offering a wider range of lower priced commodities and provide goods that fulfil emerging needs among consumers (Hill, Cronk, and Wickramasekera, 2013). The company can also overcome economic downtimes by reducing operating costs by eliminating redundant functions and improving operational efficiency. The highly competitive nature of the retail sector and the high bargaining power of consumers affects the market share and the profitability of John Lewis. The company can increase its market share by targeting specific segments of the consumer base. Market research can help the company to identify customer needs and changing trends.John Lewis should also offer unique and high quality products to more attract customers and increase revenues (Gregoire, 2015). John Lewis faces the risk of financial penalties and a poor reputation if it fails to uphold environmental protection laws. The company should develop and implement an environmental sustainability plan to ensure compliance. The changing socio-cultural environment affects consumer behaviour, which affects the profit margins of John Lewis. The company should alter its product portfolio to include more products for the elderly. John Lewis should also increase its presence in the online retailing platform in line with the changing technological landscape.

3.0 INTERNAL CAPABILITIES, CULTURE, AND CORPORATE SOCIAL RESPONSIBILITY

3.1 Internal Capabilities- SWOT analysis of John Lewis

Strengths

John Lewis has a leading position in the department store sector with a larger market share than Marks and Spencer, House of Fraser and Debenhams. The company has a good reputation among consumers (Jones, Comfort, and Hillier, 2007). The impeccable brand image of John Lewis has enabled the company to attract and retain many customers. Customers who frequent the stores have a high sense of loyalty to the company, which grants John Lewis a strong customer base. With pre-tax profits of £224 million, the company has the resources to open new stores around the UK (Ruddick, 2015). The company has a workforce of over 90,000 employees, which allows the company to operate a diverse range of operations and to expand with ease. All employees who work for John Lewis are shareholders in the business which pushes them to work more diligently to make the company profitable (JohnLewis, 2016). The company has a highly developed online shopping system. John Lewis has continually outsold rival company through online retailing (Fioriti, 2014). The company has advanced technological infrastructure to support business services. The partnership of John Lewis with Waitrose enables the company to widen its distribution system and to offer a wider range of products.

Weaknesses

John Lewis operates only within the UK, which restricts the growth of the company’s customer base and revenues. By operating only 40 department stores, the company has a low presence countrywide. As compared to other companies in the retail sector, John Lewis has a low price/returns ratio (Ruddick, 2015). The low returns can be attributed to the inability of the company to utilize resources profitably and effectively. The company has a narrower customer base because it targets mainly high-income earners due to the premium prices. The profits of the company have been dwindling in the past few years because of poor corporate governance and slow growth.

Opportunities

John Lewis has an opportunity to expand into unexploited markets in Europe, North America and Asia. The company can expand its online retailing division to increase sales from online shopping (Wrigley and Lowe, 2014). The company has the opportunity to offer more products and packages to cater to the needs of the elderly population. John Lewis can acquire of partner with smaller retailers in the UK in order to increase its presence and increase market share. The company can exploit changing trends such as the increasing health and environmental awareness among consumers.

Threats

John Lewis faces price competition from other retail companies in the sector. Larger companies such as Tesco, ASDA and Sainsbury’s have the capacity to lower prices considerably so as to attract customers. Other retail companies are opening new stores at a higher rate than John Lewis. Customers are slowly shifting away from commodities that are less eco-friendly. The declining financial results in the last 3 years may discourage people from investing in the company (Ruddick, 2015). The relatively poor performance of Waitrose may derail the growth John Lewis.

3.2 John Lewis Corporate Culture

The mission of the company is to satisfy all its stakeholders through a successful business and satisfactory employment with the capacity to sustain and enhance its position in retail and to thrive as an employee owned business (John Lewis, 2016). The vision of the company is to have a thriving business empowered by employees. John Lewis pursues success by ensuring that all stakeholders in the business are satisfied. The company measures its success by evaluating how John Lewis sustains its position as a leading retailer and employee-owned business. The core value of John Lewis is to provide outstanding services to customers while providing choice and value. The company deals with customers in an open and transparent manner in order to inculcate loyalty and trust (Geraghty, 2014). John Lewis strives to honour all agreements, whether implicit or explicit, with their partners and customers. The company’s employs talented and skilled people regardless of their race, age, gender, disability and religion. Employee ownership motivates workers to increase their productivity and to have deep loyalty to the business. John Lewis operates with a high sense of ethical and moral obligation. The management operates with the principles of inclusion and engagement of all employees in the company’s decision-making process (Geraghty, 2014).

3.3 Corporate Social Responsibility

John Lewis subscribes to a strict corporate social responsibility (CSR) policy as outlined in the company’s constitution. The company offers financial support, amounting to £90 million, towards charities and community groups in the cities it operates in (JohnLewis, 2016). The company established the Golden Jubilee Trust Scheme to enable employees to volunteer and contribute to various community initiatives around the UK. John Lewis sources for most of its suppliers from vendors based in the UK. The company ensures that most of its workforce is drawn from the communities in which it operates. The company has taken steps to reduce its impact on the environment by reducing the use of fossil fuel, using recyclable or reusable packages, and instilling energy efficiency (Jones, Comfort, and Hillier, 2007). John Lewis is in the process of implementing a 10-year plan aimed at reducing the company’s carbon footprint.

3.4 Summary of Findings and Recommendations

John Lewis has a larger market share than other chains of department stores and upholds its reputation among consumers. The large diverse workforce of over 90,000 workers owns the company and allow for a wider scope of operations. The advanced technological blueprint of the company supports business functions and aids customer service. John Lewis is a leader in the division of online retailing. However, the retailer only operates in the UK and has just over 40 stores countrywide. The company records low price to returns ratio due to poor resource utilization. John Lewis caters mostly to high-income earner and profits have been declining. The company can overcome these challenges by implementing a plan to open a minimum of three stores annually. Opening new stores will enable John Lewis to attract more customers, increase market share, and utilize its human resources efficiently. The company should increase its presence in major cities within the UK and venture into other countries (Hill, Cronk, and Wickramasekera, 2013). The company should offer products in lower price ranges in order to attract lower income earners. These strategies will help the company to increase revenues and grow its market share. The company can improve its brand image by engaging in more CSR projects especially in the fields of healthcare and education.

4.0 OVERSEAS OPPORTUNITIES FOR JOHN LEWIS

4.1 International Opportunities

Due to rapid globalization, there is higher tolerance for foreign companies across the globe. Globalization has bridged the gap in shopping habits and consumer preferences across the world (Gregoire, 2015). John Lewis can also venture into markets in Asia and South America (Hill, Cronk, and Wickramasekera, 2013). Markets in these three regions are attractive because of the high populations and continued growth. The regions have comparatively lower department stores per population as compared to the UK and other European nations.

Entering into underserved markets will increase the presence of John Lewis internationally and guarantee profitability. The regions would also be lucrative outings for John Lewis because of the increasing size of the middle-income bracket in constituent countries. Thereby, more of the population will have disposable income to purchase items from department stores (Gregoire, 2015). Countries in Asia and South America are witnessing the growth of the organize retail market. John Lewis will have more success by exploiting organized retail markets that less organized sectors. Citizens of most countries in the Middle East, especially in the Arabian Peninsula, have high purchasing power, a prospect that is attractive to John Lewis. The high rate of urbanization in Europe, South America and Asia presents a business opportunity for John Lewis.

4.2 Potential Country: United Arab Emirates

The United Arab Emirates (UAE) is a country situated in the Arabian Peninsula next to the Persian Gulf. The capital city is Abu Dhabi while the second largest city is Dubai. UAE was chosen as a potential country because of the size of its population, the population growth rate and highly urbanized nature (Madichie and Blythe, 2011). UAE is a highly lucrative prospective market for John Lewis because 85.5% of the population lives in urban areas especially in the cities of Dubai, Abu Dhabi, Ajman, and Sharjah (CIA, 2016). The UAE is a potential market because of its thriving economy. The high per capita income of the residents of UAE guarantees that most of the population will have the income to purchase commodities sold by John Lewis. The UAE has a highly developed economy with a well-organized retail sector, which will facilitate the entry and growth of John Lewis. The UAE has a low unemployment rate and a steady GDP growth rate. The UAE is an appropriate country because it has few regulations against foreign investments (UAE, 2016). John Lewis will set up a department store in Dubai because the city has high population of 2.4 million people and a large proportion of high-income earners with high purchasing power (Madichie and Blythe, 2011). Dubai is also suitable because expatriates comprise a majority of its cosmopolitan population.

CAGE Model Analysis of the UAE

Cultural Distance

Languages are different with the UK speaking English while UAE mainly speaks Arabic. A majority of the population are Arabs with sizeable populations of Indians, Pakistanis, Persians, Europeans and Filipinos. UK is a majority Christian nation while the UAE is a majority Muslim nation. In the UAE, businesses are conducted through mutual trust between partners (UAE, 2016). Just like the UK, a sense of courtesy and respect is a highly valued social norm.

Administrative Distance

The UK and UAE have political ties because the country was colonized by Britain. The two countries lack a common trading bloc since the UK is part of the EU while UAE is part of OPEC. There exists a distance in currency because the UK uses the pound whereas the UAE uses the dirham. However, there is low political hostility between the UK and the UAE. UAE utilizes an open market policy with few barriers to exportation and importation. The taxation policies of UAE are favourable to John Lewis because the government does not impose taxes on the income of general businesses while VAT is a low of 5% (UAE, 2016).

Geographical Distance

The UAE, situated in the Middle East, is moderately distant from the UK located in Europe. As such, the two countries do not share any borders. The UAE is four time zones ahead of the UK (CIA, 2016). The UAE experiences a desert climate with hot summers and relatively warmer winters while the UK experiences a temperate oceanic climate. The UAE has a well developed air and road transport network which makes navigation easy. Sea ports in the country include Port Zayed and Port Rashid.

Economic Distance

In terms of GDP, the UAE has the second largest economy in the Middle East. The country has a high per capita income of $67,000 (CIA, 2016). The UK has a larger economy than the UAE but the UAE has a higher GDP per capita. The economy of UAE is anchored on the oil industry with considerable contribution from the service, hospitality, retail and financial services sectors. Large portions of the working population in major cities such as Dubai and Abu Dhabi are expatriates.

5.0 RECOMMENDATIONS

The recommended market entry strategy for John Lewis into the UAE is the joint venture approach. The joint venture strategy will involve John Lewis entering a strategic alliance with another company currently operating in UAE in order to establish operations. John Lewis will utilize the market research undertaken by the UAE-based company to develop a marketing strategy that will attract customers (Leih and Teece, 2014). A joint venture will help to reduce the investment risk by sharing it between the two companies. The joint venture will provide enough financial resources to enable the retail business to expand within the new market. The retail venture will grow quickly because the UAE-based company will have a good understanding of the geographical, socio-economic and economic environment of the country.

The companies will overcome issues related to joint management by empowering a board comprising of top executives from both companies. To avoid issues related to profit sharing, the two companies will share profits based on their financial contribution and amount of risk involved in their operations. To avoid conflict, the partners will develop a shared pool of resources to be utilized by the joint venture (Leih and Teece, 2014). The two companies will also develop a joint information pool to facilitate the exchange of information to enable operational efficiency and growth. The companies will establish an agreement that will govern the establishment and termination of the joint venture.