Analysis – Supermarket Industry

An understanding of the business market structure and the ability to analyse the business environment are essential tools for any organisation. Given that firms rarely operate in a stable environment it is vital that the owners and managers continually monitor and assess the performance of competition in the external environment but most importantly their own organisation. The firm should aim to develop their mission and objectives to aid in the process of an environmental analysis to achieve the formulation of strategy, planning and operations.

The purpose of this report is to identify the principle and influential elements when conducting an environmental analysis; the scenario involves being employed as a business analyst who advises clients on emerging business opportunities and threats. The analysis will be conveyed on the supermarket retailing industry and will comment on the attractiveness of business expansion in that sector. 2. Operational Environment: The status of the supermarkets is that of a dynamic one as it requires consideration of the future, not just the past.

The retailers will have to adjust and adapt to the changes in the market, not only to ensure survival but to take hold of any rising challenges or opportunities within the sector. The majority of the supermarkets will face a simple situation. The criteria which supports this derives from the financial position and market position. The top supermarkets in the economy possess a financial clout that enables them to drive their purchasing costs down and when buying products in mass. The greater proportion of firms exhibit diversified products which enables them to achieve a more reformed future than a complex one.

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Tesco, for example, along with many other leading supermarkets offer an extensive scope of diversified services ranging from loans, insurance and mobile phone tariffs.

PESTEL (PEST) Analysis

The structure and functioning of an organisation is not only determined by internal factors but is also strongly influenced by a range of external environmental factors. In order for any supermarket to maintain survival and growth within the market they must respond to any opportunities, challenges or risks.

The most common method of analyzing the environment is to identify and explain the key external factors that are likely to affect the performance of a business. This is known as a PESTEL Analysis. It stands for Political, Economic, Socio-Cultural, Technological, Environmental and Legal influences. In 2005, Mullins dictated that, "it is necessary to consider how a firm can achieve an internal and external balance and how they are able to adapt to changes in their environment and the demands place upon them (pg 126).

"Establishing the 'balance' between the factors will help any supermarket in the long run, hence the analysis being so significant. Appendix 1 presents the main issues that might be considered when undertaking a PESTEL analysis.

Political Factors

Any environmental or government issues need to be addressed. Factors including monopolies legislation or environmental protection laws are important. The legislation stands that any of the supermarkets are not allowed to build on 'brown belt' land, as this is prohibited to protect the environment.

Regarding this, thought also has to be given to where to new buildings are situated as noise, pollution, residential areas etc have to be considered. Foreign trade laws could affect the retailers in the near future as import and export laws could produce problems regarding purchasing stock and services internationally. Consideration given to employment laws enforces codes of practice within the industry. If the legislation is to change the firms will need to cohere to the modifications.

Economic Factors

Rates of interests, tax and inflation are all vital influences. The amount of tax the company has to pay may restrict on other things and have a knock down effect on other areas of the company e. g. employment increases and pay rises. If the rate of inflation changes this could also affect the company. It could mean that suppliers increase their prices which in turn lead to increased buying costs. Unemployment rates and consumers disposable income have an existing role as the lower amount people have to spend will end in cheaper branded (no-frills) products being purchased leaving less profits for the company.

Socio-Cultural Factors

Social factors influence people's choices and include the beliefs, values and attitudes of society. Such changes can impact purchasing behaviour. Consumer attitudes and beliefs lead to brand loyalty to a supermarket. Realising the change in consumers' opinions will allow the company to make any needed changes. If the changes aren't acknowledged the customers experiences could have a knock on effect for the company from their word of mouth.

Added complications when looking at social and cultural factors are differences in ethnic and social groups. Not all groups have the same attitudes - and this impacts how they view products and services. Demographic changes also have a major role as these can affect the number of customers a supermarket receives each day. New builds need to consider where people are living regarding motorway links, local residential areas and how accessible the store is.

Technological Factors

Advances in technology can have a major impact on business success.

As well as advances in the supermarket industry, the likely impact of new technologies - the Internet, mobile phones, and the increasing advances in computing and computers will affect how businesses are run in the future. Taking advantage of any technology that could make producing their products easier and that could make the firms products obsolete will benefit any supermarket. Government spending on research could lead to a change as a result of study in fast-food, obesity, additives etc. This already has lead to change within businesses including new labeling policies.

Porter's Five Forces Model

The PESTEL analysis is of limited value unless accompanied by a detailed understanding and analysis of the factors involved and the interactions between these factors. This is where Porter's Five Forces Model is applied. Worthington, Britton and Rees (2001) define the analysis to be the structure of an industry and the ability of firms to act strategically depend on the strengths of five forces: 4. 1 Bargaining Power of Suppliers: The structure of the industry can relate to the business if the firm can get the same supplies from elsewhere.

This depends on how many suppliers there are to choose from. The suppliers in supermarket retailing are not monopolistic. As a result they may not be able to extract a high price from the retailers as they have the choice to go elsewhere. They may still hold their power if they are able to integrate forwards in order to obtain higher prices and margins. Also they are able to hold their position if it is difficult or costly for the supermarket to change.

For example, it would not be ideal for a smaller supermarket such as Somerfield to negotiate suppliers, as they do not hold the buying power as that of e. g. Tesco, therefore they would not be able to demand a lower selling price. In turn the suppliers would be able to hold their bargaining power over the smaller chains.

Threat of Substitutes:

A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. Competition from substitutes limits the price that can be asked. Regarding supermarkets this applies to several goods they sell as there is more than likely to be more than one brand.

For the likes of Asda, Sainsbury's and Tesco, petrol is an exception as there is no substitute meaning demand is inelastic respective to price. Clark (2000) argues that the substitutability of a firms products' are important insofar as having many substitutes increases elasticity of demand and thereby reduces the products profit potential.

Bargaining Power of Buyers

This refers to the ability of buyers to negotiate and bargain over purchase prices. Adapted from Perman; Scouller (2004). In respect to supermarkets purchasing from suppliers, a large chain such as Tesco are in a healthy financial position and are able to use their buying power to drive the suppliers costs down and in turn retain money to utilize in other ways.

Threat of New Entrants

The competition in the supermarket industry will be higher, the easier it is for other businesses to enter the market. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry.

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