Woolworths Ltd - A Case Study Report

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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 2010-3-95-078

Kamrul Hassan 2010-2-91-015

Bahauddin Arafat 2010-3-91-031

Date of submission: July 03, 2012

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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,

Md. Mesbah Uddin

2010-3-95-078

Bahauddin Arafat

2010-3-91-031

Kamrul Hassan

2010-2-91-015

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Table of Contents

Sl. No. Titles Page No.

1 Overview 4-5

1.1 Australia‘s Retail Industry 4

1.2 Woolworths‘ Overall Business 4

1.3 Objectives 5

2 External Environment Analysis 6-8

2.1 Macro Environment Analysis 6

2.2 Porter‘s Five Forces Analysis 7

3 Internal Environment Analysis 9-11

3.1 Resources 9

3.2 Capabilities 9

3.3 Core Competency 10

3.4 Value Creating activities 10

3.5 SWOT analysis 11

4 Answering the Questions 12-16

5 Conclusion 17

6 Recommendation 18

7 References 19

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1

Overview

1.1 Australia’s 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 Australia‘s 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 Murphy‘s, 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 Australia‘s 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 items-

which 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 mover‘s 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: Australia‘s 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 Porter’s 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 today‘s 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 firm‘s strengths and

weaknesses. Analyzing the strengths and relationships among the activities that constitute a

firm‘s 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 organization‘s 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 Weakness

Strong Financial position

Wide range of product

Better supply chain management

Brand image & Reputation

Market leader with market share 31%

Operating cost is more because too

large

Debt increase

Higher overall cost

Reduced Petrol margin

Opportunities Threats

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

opportunity

Slow growth and uncertainty in the

Australian economy in recent time

Recession and growing

unemployment

Increase in alcohol-related diseases

and pressure from Government to

reduce the business

The growing dominate power of

suppliers

Technological advantage

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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 it‘s a new venture or an established player. Business

models are, at heart, stories—stories that explain how enterprises work.

According to Thompson et al. (2010), ―A company‘s 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

four–box 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 firm‘s

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 consumer‘s 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 Australia‘s 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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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_australia [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, McGraw-Hill/Irwin.

WOOLWORTHS LIMITED. 2011. Annual Report [Online]. Available: www.woolworthslimited.com.au [Accessed 1 July 2012].

http://www.researchandmarkets.com/reports/1607489/internet_retailing_in_australia

http://www.researchandmarkets.com/reports/1607489/internet_retailing_in_australia

http://www.woolworthslimited.com.au/

Woolworths Ltd - A Case Study Report

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