Case Study: Woolworths Limited

Case Study on

Woolworth Limited
Course Code: MBA/EMBA 600 Strategic Management Course Teacher: Dr. Nazmul A Majumder

Prepared by: Md. Mesbah Uddin Kamrul Hassan Bahauddin Arafat 2010-3-95-078 2010-2-91-015 2010-3-91-031

Date of submission: July 03, 2012

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Case Study: Woolworths Limited

Letter of Transmittal

July 03, 2012 Dr. Nazmul A Majumder Course Instructor: Strategic Management (MBA/EMBA 600) East West University, Dhaka
Subject: Submission of case study report on Woolworths Limited: Retail leader in Australia

Dear Sir, Here is the case study report on Woolworths Limited: Retail leader in Australia as you asked us to prepare for the partial fulfillment of the Strategic Management course. With great pleasure we are submitting this report as an integral part of the course. Working for this report has definitely enriched our knowledge about the External and Internal Environment analysis, SWOT analysis, Business Model, Core competencies & competitive advantages of a business, generic business strategies etc. and writing case study report, which ultimately strengthened our overall understanding of the Strategic Management. As per your direction, we tried our level best to highlight our findings by applying strategic management concepts and models. We tried to gather a collection of information to make our report specific and coherent, and make the report as reflective as possible. We are really thankful to you for giving us such a splendid opportunity to present you the report, which is authentically based on team effort and we appreciate this kind of work by our heart. We also appreciate to provide any information or clarification if necessary. Thank you for your consideration. Sincerely Yours,

Kamrul Hassan 2010-2-91-015

Md. Mesbah Uddin 2010-3-95-078

Bahauddin Arafat 2010-3-91-031

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Case Study: Woolworths Limited

Table of Contents

Sl. No. 1 1.1 1.2 1.3 2 2.1 2.2 3 3.1 3.2 3.3 3.4 3.5 4 5 6 7 Overview

Titles

Page No. 4-5 4 4 5 6-8 6 7 9-11 9 9 10 10 11 12-16 17 18 19

Australias Retail Industry Woolworths Overall Business Objectives External Environment Analysis Macro Environment Analysis Porters Five Forces Analysis Internal Environment Analysis Resources Capabilities Core Competency Value Creating activities SWOT analysis Answering the Questions Conclusion Recommendation References

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Case Study: Woolworths Limited

1 Overview
1.1 Australias Retail Industry
The Australian retail industry consists of almost 140,000 retail businesses (Productivity Commission, 2011) with a very few major players in the supermarket industry; and the key players are Woolworths Ltd., Coles Group Ltd. and others, e.g. ALDI, Metcash/IGA, Foodworks, AUR/Foodworks, SPAR Australia and Macro Wholefoods (Alam and Majumdar, 2011). The retail industry is one of Australias largest employers. There are about 1.2 million people (10.7% of the total working population) employed in this industry (Productivity Commission, 2011). Businesses in this industry retail widest choice of groceries and non-specialized food lines, including fresh fruits & vegetables, bread & pastries, cigarettes, canned goods, toiletries, dairy goods, deli items, and cleaning merchandise (Alam and Majumdar, 2011). The retail industry is a significant contributor to the Australian economy, generating $53 billion or 4.1% of GDP (Productivity Commission, 2011). In Australia larger businesses in retail (i.e. large supermarkets) are generally more profitable than smaller businesses and enjoy better returns on capital than their overseas counterparts, and the supermarket industry is now dominated by two large chains, Coles and Woolworths (Cotterill, 2006).

1.2 Woolworths Overall Business

Woolworths opened its first store in Sydney in 1924 as a bargain basement outlet. Through acquisition and expansion Woolworths has become the largest supermarket chain in Australia, with a 31% market share (Alam and Majumdar, 2011). The major brands operate under Woolworths Ltd. include: Woolworths/Safeway supermarkets, Dick Smith Electronics, Tandy, Dan Murphys, Big W, Dick Smith Powerhouse and BWS. Among these, supermarket industry is one of the most prosperous ventures for Woolworths and is the main focus of this case study. Woolworths is one of Australias largest retailers in terms of sales revenues, number of supermarkets & stores and geographic area coverage. It has 3,200 stores across Australia and New Zealand, with 840 supermarkets in Australia and 156 supermarkets in New Zealand (Woolworths Limited, 2011). Woolworths also has global presence in India with a joint venture agreement with Indian supermarket chain Tata and operates 22 retail
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stores there which generated sales revenue of $104 million in 2007-2008 (Alam and Majumdar, 2011). Woolworths EBIT in the 2011 financial year was $3.3 billion, with approximately $3.1 billion coming from Australian operations and $196 million from New Zealand. Woolworths has demonstrated consistently strong financial performance. Sales and EBIT have exhibited solid growth over each of the past five financial years with a compound average growth rate for sales of 7.5% and 13.7% for EBIT from the period 2006 - 2011. As on 14 October 2011, Woolworths was one of the 10 largest companies listed on ASX, with a market Capitalization of $29.9 billion (Woolworths Limited, 2011).

1.3 Objectives
The objective of this case study report is to answer the following questions with a brief internal and external environment analysis.

Identify the main characteristics of the industry in which Woolworths operates. What is a business model? Critically examine the principal features of Woolworths business model. Which important competencies did Woolworths use to add value to its strategic management practices to ensure its sustained growth?

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2 External Environment Analysis

External environment analysis is very much important as we cannot or should not develop strategies in a vacuum. The strategies must be responsive to the external business environment; otherwise the firm could become the most efficient producer of obsolete itemswhich have no value in the market. To avoid such mistakes, firms must become knowledgeable about the business environment (Dess et al., 2007). To this extent we have briefly analyzed the external environment of Australian retail industry where Woolworths operates. The external environment includes all relevant factors & influences outside the company boundaries, such as:

2.1 Macro Environment Analysis:

2.1.1 Political /Legal Environment: Government has a direct impact on the supermarket industry in regards to legislating trading hours, and through the monitoring and regulation functions of the Australian Competition and consumer commissions (ACCC), the commonwealth Government, the trade practices act (TPA) and the foreign investment Review Board (FIRB) (Alam and Majumdar, 2011). 2.1.2 Technology: Woolworths has adopted new technology. It was the first major retailer to subscribe to GEMMnet( Global Electronic Marketing & Merchandising Network) in 1994. It also invested to improve its supply chain and distribution system which has significant impact in cost savings. It also increased the online shopping facilities and developed company website- which gave Woolworths a first movers advantage (Alam and Majumdar, 2011). 2.1.3 Global Segment: Woolworths has expanded its business operation in New Zealand & India to sustain its growth in retail industry and capitalize on its market strengths. 2.1.4 Economic Segment: The slow growth and uncertainty in the Australian economy in recent times poses a threat for the retail players, as their growth may be stagnant in future if

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the situation prevails for long. The growing unemployment rate, possible increase in fuel prices and wages are also a matter of great concern for the participants in the industry. 2.1.5 Demographic Segment: Australias population was 21 million in 2008 and there is a mix of ethnic and religious groups due to its immigration policy. In Australia, those over the age of 65 currently constitute approximately 12% of the population and the forecast is a 25% growth by 2051. The 85+ group is experiencing the fastest growth rate; with the number of people in this age group expected to almost quadruple to approximately 5% in 2051 (Pettigrew et al., 2005). 2.1.6 Socio-cultural Segment: Changing societal concerns, attitudes and lifestyles have resulted in dramatic changes in the supermarket industry in Australia. People are very much concern about health and obesity now-a-days. Hence, there is a demand for low-fat foods, easy to cook food, organic and GM-free food. The participation of women in workforces has also increased in recent time (Alam and Majumdar, 2011).

2.2 Porters Five Forces Analysis

According to Porter (2008), awareness of the five forces can help a company understand the structure of its industry and stake out a position that is more profitable and less vulnerable to attack. Industry structure drives the competition and profitability- no matter whether the industry is emerging or mature, high tech or low tech, regulated or unregulated (Porter, 2008). From the five force analysis a company can take its position in the industry based on its competitive strengths. But the strategy should not be focused on elimination of rivals, because it is a risky strategy. A profit windfall from removing todays competitors often attracts new competitors and backlash from customers and suppliers (Porter, 2008). 2.2.1 Bargaining power of Buyers: In Australia Supermarkets offer almost homogenous products which have low switching costs between stores and thus has provided buyers with extremely high bargaining power. The bargaining power of buyers in this industry is very high, with the exception of stores customizing their offering to a specific market. 2.2.2 Bargaining power of Suppliers: The bargaining power of suppliers in the supermarket retailing industry varies depending on the brand name of the suppliers and the size of the supermarket. Such as British American Tobacco and Coca Cola are that type suppliers who
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enjoy strong power in the supermarket. Hence, the bargaining power of suppliers in the supermarket retail industry in Australia is high to moderate. 2.2.3 Industry Substitutes: In the supermarket industry there are also a number of substitutes for consumers such as convenience stores, pharmacies, non-affiliated petrol stations, online stores, grocery stores, delicatessens and fresh food markets. Consumers are willing to pay high prices for the convenience e.g. closer to home, no queues, easier parking. Thus the availability of substitutes in the supermarket industry is moderate to high. 2.2.4 Threat of New Entrants: Due to low price offer in Australian retail shops & domestic supermarket industry it is not an attractive industry to enter, with a low profit potential. The scarce availability and high market price of land, huge capital requirement, government restrictions and regulation etc can act as barriers to entry. The relationship of existing big players with the suppliers and requirement of establishing own distribution centers by the new entrants can also be a barrier. It seems that the barriers to entry in supermarket industry are moderate. 2.2.5 Rivalry among competitors: The rivalry between competitors in the supermarket industry is intense.

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3 Internal Environment Analysis

Internal environment analysis is very much important for identifying a firms strengths and weaknesses. Analyzing the strengths and relationships among the activities that constitute a firms value chain can be a means of uncovering potential sources of competitive advantage for the firm (Dess et al., 2007). For example, the poor retail performance in 2011 forced many retailers to look again at their business model and to assess opportunities in online retailing- in an environment where consumer confidence is weak (Research and Markets, 2012). Thus from internal analysis a firm can repositioned in the market with new offerings by flanking its vulnerabilities. Now we are going to analyze different components and parts of Woolworths internal environment.

3.1 Resources:
At the end of the 2008 calendar year, Woolworths operated 3,000 stores across the Australia & New Zealand, and Employee approximately 180,000 people. This means that its tangible & intangible resources are very strong. Woolworths has efficient management and human resources, wide range of product and product innovation skills, well designed logistics management, strong brand image and reputaion for quality and fresh food, partnership and alliance management and strong relationship with vertically-integrated businesses

3.2 Capabilities:
Capabilities refer to an organizations skills in coordinating its resources putting them to productive use (Alam and Majumdar, 2011). We have found that from 1924 Woolworth is running business very successfully, it means that it capable to use right person in right position and Woolworth knows how to use or set the resources.

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3.3 Core competency:

3.3.1 World-class supply chain: Woolworths innovation and competitive advantage have developed through its supply chain. Woolworths has significantly focused on efficiency and cost cutting in managing unnecessary expenses. 3.3.2 Branding & Market: Woolworths has positioned its stores with The fresh food people slogan, creating a differentiated image of quality and healthy product range at responsible prices. 3.3.3 Innovation: Woolworths has implemented several project, including re-fresh, the new idea program petrol retailing. 3.3.4: Integration: Woolworths has vertically integrated some of its supplies by producing its own inputs to increase its market power and to respond to the private level trend.

3.4 Value Chain Analysis:

There have different value-creating activities of Woolworths Inbound logistics: it uses its own distribution centers as a result finnaly take advantage to procure bulk quantity and reduce Cost price and take advantage from suppliers as a discount Operation: Woolworths has a own farmer as a result they can take supply from root level as fresh product with reduce cost. Outbound logistics: in store vendor quality management system is used, ensuring product quality & Freshness of product. Marketing & sales: Woolworth spends more amounts for marketing. It makes successful brand awareness. Customer Service: Refund polices and also reduces the waiting times the use of trolley mounted scanner.

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3.5 SWOT Analysis:

Strengths Strong Financial position Wide range of product Better supply chain management Brand image & Reputation Market leader with market share 31%

Weakness Operating cost is more because too large Debt increase Higher overall cost Reduced Petrol margin

Opportunities The potential to increased the customer base The potential to increase market share Growth opportunity in the health food sector Population increase & diversity The opportunity to use ICT to cut costs and pursue new sales

Threats Slow growth and uncertainty in the Australian economy in recent time Recession unemployment Increase in alcohol-related diseases and pressure from Government to reduce the business The growing dominate power of suppliers Technological advantage and growing

opportunity

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4 Answering the Questions

4.1 The main characteristics of the industry in which Woolworths operates
Woolworths operates in the Australian retail supermarket industry which consists of a very few major domestic and international players. The main characteristics of the industry are: There is direct government interference in trading hours and close monitoring of the business activities of the players. Consumers demographics, societal concerns, attitude and life styles are changing Huge capital requirement for running large supermarket chain, i.e. overhead cost is high The entry barriers are moderate. The bargaining power of buyers is very high, with the exception of specialized stores. The bargaining power of suppliers in the supermarket retail industry is high to moderate. The availability of industry substitutes in supermarket industry is moderate to high. The retail industry in Australia is mature and intensely competitive due to the population size (21 million) and the presence of multiple supermarket giants in the market. Hence, the Australian domestic supermarket industry is not an attractive industry to enter, with a low profit potential.

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4.2 Critical Examination of the Principal Features of Woolworths Business Model

According to Michael Luscombe (Woolworths MD & CEO), Woolworths maintained a clear focus on meeting our customers needs by delivering lower prices, greater ranges and better shopping experiences across all our brands (Woolworths Limited, 2011). According to Magretta (2002), business model is one of the great buzzwords of the Internet boom, to glorify all manner of half-baked plans. A good business model remains essential to every successful organization, whether its a new venture or an established player. Business models are, at heart, storiesstories that explain how enterprises work. According to Thompson et al. (2010), A companys business model explains the rationale for why its business approach and strategy will be a moneymaker. Absent the ability to deliver good profitability, the strategy is not viable and the survival of the business is in doubt. According to Johnson et al. (2008), a business model consists of four interlocking elements that, taken together, create and deliver value. Johnson (2010) believes that the basic architecture underlying all successful businesses consists of the four interdependent elements that can represented by four boxes. 1) Customer Value Proposition (CVP): The CVP describes how a company creates value for a given set of customers at a given price. 2) Profit Formula: This describes the way a company will capture value for itself in the form of profits. 3) Key Resources and 4) Key Processes the means by which the company delivers value to the customer and itself. We can critically analyze the principal features of Woolworths business model using the fourbox business model framework (Johnson, 2010, Johnson et al., 2008). Woolworths Customer Value Proposition (CVP): Meet customers needs by delivering competitive low prices, consistent high quality, greater ranges, and better shopping experiences across all the brands.

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Woolworths Profit Formula: Low prices Cost savings through efficient supply chain management & economies of scale; difersification to increase profit High volume & low margin High resource velocity Woolworths Key Resources: Efficient management and human resources Wide range of product and product innovation skills Well designed logistics management Strong brand image and reputaion for quality and fresh food Partnership and alliance management Strong relationship with vertically-integrated businesses Woolworths Key Process: Continuous improvemnet and adopting best practices in operation Aggressive advertisement and promotional activities Overall value chain initiatives o To the reengineering of processes, o To stop needless work o To get every process pointed in the direction of consumer satasfaction o To reduce cycle time o And to achieve total quality Outside directors on Board of Directors to avoid conflicts of interest and maximize shareholder value Offering more services e.g. one-stop-shop concept: combination of petrol retailing with grocery retailing Product development & related diversification High standard of customer service Despite the intense competition and low profit potential, Woolworths have a 10.7% growth in its sales (Alam and Majumdar, 2011) which is a clear indication of its superior business
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model. And a profitable business is the best early indication of a viable business model (Johnson et al., 2008).

4.3 Important Competencies Woolworths Uses to Add Value and to Ensure its Sustained Growth
Michel Porter (1996) presented three generic strategies that a firm can use to achieve competitive advantage and ensure sustained growth. These are: 1. Overall cost leadership: is based on creating a low-cost-position relative to a firms peers. With this strategy, a firm must manage the relationships throughout the entire value chain and be devoted to lowering costs throughout the entire chain. 2. Differentiation: requires a firm to create products and/ or services that are unique and valued by the customers. 3. Focus: finding a market segment and concentrate activities there. From researches it is evident that businesses combining multiple forms of competitive advantage (e.g. cost & differentiation) outperformed business that used only a single form and the highest performers were business that attained both cost and differentiation advantages (Dess et al., 2007). Woolworths adopts an integrated competitive strategy, i.e. it utilizes a combination of both overall-cost leadership and differentiation strategies, in search for sustainable competitive advantage (SCA) over its rivals in the supermarket industry. According to Porter (1996), a company can outperform rivals only if it can establish a difference that it can preserve. From the Woolworths case, we can clearly identify the following important competencies- which make the firm a leader in its chosen industry. World-Class Supply Chain: Woolworths innovation and competitive advantage have developed through its supply chain. Woolworths efficient distribution network is both a resource and a capability in its inbound and outbound logistics. Woolworths has significantly focused on efficiency and cost cutting in managing unnecessary expenses. A culmination of tangible and intangible assets, such as technological capabilities and supplier relationships, is highly valuable as it contributes to the significant cost reduction throughout Woolworths entire logistics network. The level of cost saving benefits provided by the efficient supply chain is non-substitutable by any other resources and also difficult to imitate as the level and scope of the technological capabilities involved is highly specialized and staggering.
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Branding and Market position: Woolworths has positioned its stores with The fresh food people slogan, creating a differentiated image of quality and healthy product range at reasonable prices. Consumers have positive experience with the products which can be attributed to its stringent quality assessment procedures throughout its supply chain. At present, 100% of fresh meat and 95% of fresh fruit and vegetables are from Australian producers. This brand reputation is valuable, as it provides meaningful differentiation to its competitors, and has directly contributed to higher levels of customer satisfaction. Innovation: Woolworths has many innovative projects including re-fresh, new idea, and petrol retailing. It also introduced everyday money credit card in partnership with HSBC Bank and MasterCard. Woolworths has also introduced different consumers rewards and convenience programs, including everyday rewards and everyday money shopping cards. These innovations in products and offerings are clearly a competitive advantage of Woolworths over its rivals. Integration: Woolworths has vertically integrated some of its supplies by producing its own inputs to increase its market power and to respond to the private label trend. Through this integration it now has a wide range of products available under the Woolworths Select brand that aim to deliver consistent high quality. Marketing & Sales: Woolworths marketing strategy is one of its key strengths which have helped Woolworths to differentiate its product and secure its place as Australias largest retailer. Woolworths spends more on marketing expenses through magazines, newspapers, television and distributed leaflets. All of its marketing and sales activates contributed to the successful brand awareness and the fresh food image that Woolworths has achieved.

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5 Conclusion
According to Porter (2008), Rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers. The retail industry in Australia is mature and intensely competitive with a low profit potential and thus is not an attractive industry to enter. Despite the intense competition and low profit potential, Woolworths have a 10.7% growth in its sales (Alam and Majumdar, 2011) which is a clear indication of its superior business model. From the above discussion we can say, Woolworths has understood the business as a process and expanded its boundaries to include customers and suppliers. It has identified its strengths, added value to multiple activities in new and innovative ways, and leveraged its capabilities to enhance the flexibility of operations through close integration and coordination of independent activities. As the company broadens its product offerings and expands into new markets, e.g. New Zealand and India, it is likely that the benefits will only grow, entrenching Woolworths as the dominant player in the retail market and preserving the sustainability of its competitive edge.

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6 Recommendation
From this case study we are recommending the followings: In the short-term, Woolworths should adopt a social media strategy to take the advantage of low-cost promotional activities. Should offer organic and GM-free foods should participate in CSR activities- which will improve the goodwill of the firm In the long run, Woolworths should increase its R&D finance for researching alcohol-related diseases, to protect itself from the introduction of new government regulations restricting or further regulating the sale of alcohol. Woolworths should diversify in new businesses in which sales growth are projected to rise over the long term, as the attractiveness and profitability of the Australian supermarket is dry in the future.

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7 References
ALAM, Q. & MAJUMDAR, N. A. 2011. Woolworths Limited: Retail leader in Australia. Cases in Business and Management. 2nd ed.: Tilde University Press, Victoria, Australia. COTTERILL, R. W. 2006. Antitrust analysis of supermarkets: global concerns playing out in local markets. The Australian Journal of Agricultural and Resource Economics, 50, 17-32. DESS, G. G., LUMPKIN, G. T. & EISNER, A. B. 2007. Strategic Management: Creating Competitive Advantages, McGraw-Hill/Irwin, New York. JOHNSON, M. W. 2010. Seizing the white space : business model innovation for growth and renewal, Boston, Mass., Harvard Business Press. JOHNSON, M. W., CHRISTENSEN, C. M. & KAGERMANN, H. 2008. Reinventing Your Business Model. Harvard Business Review, 86, 50-59. MAGRETTA, J. 2002. Why Business Models Matter. Harvard Business Review, 80. PETTIGREW, S., MIZERSKI, K. & DONOVAN, R. 2005. The three big issues for older supermarket shoppers. Journal of Consumer Marketing, 22, 306-312. PORTER, M. E. 1996. What Is Strategy? Harvard Business Review, 74, 61-78. PORTER, M. E. 2008. The Five Competitive Forces That Shape Strategy. Harvard Business Review, 86. PRODUCTIVITY COMMISSION 2011. Economic Structure and Performance of the Australian Retail Industry. Canberra. RESEARCH AND MARKETS. 2012. Internet Retailing in Australia [Online]. Available: http://www.researchandmarkets.com/reports/1607489/internet_retailing_in_aus tralia [Accessed 22 June 2012]. THOMPSON, A. A., STRICKLAND, A. J. & GAMBLE, J. 2010. Crafting and executing strategy : the quest for competitive advantage : concepts and cases, Boston, McGrawHill/Irwin. WOOLWORTHS LIMITED. 2011. Annual Report [Online]. Available: www.woolworthslimited.com.au [Accessed 1 July 2012].

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