Strategy Formulation in the Retail Industry

Strategy Formulation in the Retail Industry Marks Spencer and Next Johnson and Scholes (2006) define strategy as, ‘Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations Corporate strategic management helps us to understand: Direction: Where business is heading in the long run. Markets; Scope: In which market business should compete and what activities are involved. Advantage: How business can do better than competitors in these markets. Resources: To compete in the market what resources are required. Environment: What are the factors which will affect the business. Stakeholders: What are the expectations of stakeholders. THE THREE LOGICAL ELEMENTS OF THE STRATEGY FORMULATION PROCESS: The three essential elements of the strategy process Strategic Intent is the driver of the strategy process. Without an underlying intent, strategy lacks an overall sense of direction and there is no reason to choose one direction rather than another. Strategic intent provides the answer to the question ‘Where do we want to go? The fundamental role of Strategic Assessment is to provide relevant knowledge about the strategic context. It has to assess both the outside world and the relative capabilities of our own enterprise. The role of strategic assessment is to anchor future strategies in reality. Strategic assessment must address the ‘Where are we now? Strategic Choice is fundamental to the strategy process because it is the link to action. It must address the question ‘Which options will we choose for getting where we want to be from where we are? If strategy is to be anything more than an intellectual relaxation then actions must result from the strategy process. The strategy formulation process: three inter-locking aspects. (Macmillan and Tampoe, 2000: 64-65) â€Å"Corporate success derives from a competitive advantage which is based on distinctive capabilities, which is most often derived from the unique character of a firms relationships with its suppliers, customers, or employees, and which is precisely identified and applied to relevant markets.† (Macmillan and Tampoe, 2000: 22, 86, 87) In order to develop competitive advantage, the decision-maker should understand in detail the enterprises skills and resources, and after that manage in a way that the business delivers superior customer value to target segments at a cost that leads to profit. (Wilson and Gilligan, 2005: 405-406) Introduction We have selected Marks and Spencer, and Next as our case study. Both are UK based fashion retail companies having almost same product line. We shall review both companys current position and future potential development according to their strategic management concepts and techniques. By comparing the statistics of two organizations we will evaluate their enterprise skills, objectives and competences that associated with their principals and formulation of individual organizational strategy. Our findings and research shall include companys resources that required addressing short term and long terming strategic challenges in pursuit of sustainable competitive advantage. Assignment focus will implement the concept and theory they have followed such as Porters Five Forces Model, PEST analysis, School of Business strategy, etc. We will undertake a comprehensive review of their past corporate strategies as well as the present economic situation and crisis of global economy. The Marks and Spencer (MS) is one of the most famous retailers in UK. It started in 1884 by Michael Marks in partnership with Tom Spencer in Leeds. Company offers various ranges of products that include stylish and high quality clothing, womens wear and lingerie, means wear, kids wear, home wear, groceries, freshly produce prepared meals etc. They have around 2,000 suppliers globally, about 75,000 employees and have 750 stores round the world. Next is also UK based retailer. It was founded in 1864 by J Hepworth Son as gentlemans Tailors in Leeds. In 1981 company develop a womens wear group of shops by the name of Next. Next has wide range of collection around the world that offers high quality products in clothing that include executive shirts and suits, stylish home products and accessories, children and teenage fashion, footwear and etc. Next has more than 500 stores in the UK and Eire. They have more than 170 franchise stores overseas. Next has following five strategic businesses NEXT Retail operates the high street shops; NEXT Directory is the mail order division; NEXT Overseas operates international retail outlets; Venturaruns the financial services division and Other activities include telecommunication software services and property management Mission Statement: Mission statement is written statement which tells the core purpose of existence of business. Mission statement show the descriptive form of vision Marks Spencer Vision To be the standard against which others are measured Mission To make aspirational quality accessible to all and Values Quality value, service, innovation and trust. NEXT We atNEXT PLChave a task to build,with the main focus of giving all of our customerswhat they deserve The Best. Individuality, long experience, courage in development, and open-mindedness are our tools. The idiom â€Å"The Customer Is The King!!!† is, in our company, not simply a kind of marketing strategy -it isTradition. COMPETITIVE ANALYSIS: Competitive analysis is done to evaluate the competitive position of the company with in an industry. There are many tools for competitive analysis but the important ones are ;Porters five forces model, PEST Analysis, Group mapping, Pricing and quantity dynamics, SWOT analysis and etc. Porter Model Porter says that there are five forces affecting a business and the company has to survive amongst all these force Bargainig power of Supplier Due to big brand names and diversified portfolio both brands are not influenced by supplier. So bargaining power of supplier is low for both brands. This factor works more when product line of business is less and there are few suppliers in the market. There is no such situation for Marks Spencer and Next. Bargaining power of buyer Because of much competition in clothing market there are many sellers and limited buyers so buyers have more options that is way bargaining power of buyer is high the nature of product and nature of buyer both Marks Spencer and Next can not get under influence. This factor affects more in B2B system. Threat of Substitute product There are may not be the exact substitute of product in case of both Marks Spencer and Next. Because there cannot be any substitute of clothing. Threat of new entrant Marks Spencer and Next both have brand loyal customers. So none of them has the threat of new entrant. Industry Rivalry Industry rivalry influences business relatively more when overall industry volume is small. When there are number of players in industry with huge investments and especially with brand name rivalry turns in shape of innovation. Being well established groups and having good financial health both MS and Next dont have such fear. PEST Analysis PEST stands for ‘Political, Economic, Social and Technological. It illustrates a framework of macro environmental factors. It explains how easy or difficult it is to make profit in a certain market. So Political condition of untied kingdom is stable and favourable for the business. So far as economic and social factors are concerned both are good. When we look at technological factor it also very much in favour of doing business in UK. So PEST for both companies is same since both are in UK. SWOT Analysis: SWOT Analysis shows business strength,weaknesses,opportunities and threats. INTERNAL ANALYSIS: Internal analysis is an internal evaluation of the business. It tells us the footing of the business that where it stands and what is the actual worth of the business. There are many tools for checking internal health of the company. For example BCG Matrix, 7s Model and accounting data of the company. Now we look at internal analysis of both companies. BCG Matrix: Boston consultant group matrix evaluates the strategic business units of the company with relative market share and market growth. If we evaluate different SBUs of MS and Next it will be like this. The portfolio of MSs products in terms of BCG matrix is good in clothing having star position and in food MS has occupied the position of question mark relative market shares is low with low industry growth and in financial services industry growth is high but MSs market share is low and will require substantial capital investment to turn them into ‘stars. either ‘dogs (cash in balance) or question marks (cash user). In case of Next they too have good sales in clothing sector occupying star position then comes its homeware at question mark position, electrical SBU comes at cash cow while its other product line like flowers and wines comes at dog level. McKinsey 7S Framework: In strategic management McKinsey7S framework is considered as one of the major landmarks. In a wide variety of situations this 7S model can be used where it is necessary. The 7 Ss are Structure, strategy, system, skills, style, staff and shared values. Both NEXT and MS are fully exercising the 7s model and coordinating at all levels to generate maximum output. Structure of both companies are will defined since both are very old player in this industry so they have learnt a lot from their experience curve and now have developed an outstanding structure. In the initial phase both companies got experience through hit and trial method and now have developed good strategies and system. Both companies have got excellent skills and are full getting benefit of these skills. Both companies are well known figures in clothing industry and have gained professional and productive staff. Both companies have shared values which are widely spread in its all 7s and are reflected by their strategic moves. Accounting Data Analysis: Accounting data analysis shows the growth trends of the company which is very helpful in taking strategic decisions. Following figures just shows the trend of both companies that either company is getting positive response or if there is any downward trend is seen then its reason is traced out so that right strategic move should be taken in future. M S is the leading clothing retailer with market share11.2% Market share of food sector is 3.9% of total UK market. Market share fell down as compared with previous year from 11.2% to 10.7%this was because of effect of recession QUARTER 3 2009/10 INTERIM MANAGEMENT STATEMENT Group sales +2.6% UK sales* +2.3%: General Merchandise +3.2% (Clothing +4.0%; Home -0.7%); Food +1.3% UK like for like sales* +0.8%: General Merchandise +1.2%; Food +0.4% Online sales +32% International sales +6.0% Next Progress in the first half has been better than expected and the business has proved itself resilient in the face of a weak consumer environment.Sales and operating margins were ahead of last year in both Retail and Directory.Financial highlights are as follows: Group revenues increase to  £1,512m Group operating profit increases to  £199m Earnings per share rise to 68.2p Cash inflow of  £114m Net debt reduced to  £514m, ample debt facilities of  £1bn Interim dividend increased by 1p to 19p Ansoffs Matrix : We can use Ansoffs product/market matrix to identify directions for Marks and Spencer and Next strategic development. This matrix offers directions for strategic option available to MS and Next in terms of products and market coverage, taking into account its strategic capability and also expectation of stakeholders. We can see from the Ansoffs Matrix that Marks and Spencers lunch of Financial services products will have involved a diversification strategy. As MS did not already sells financial products, so new market and new product. Both capability and market consideration has driven MS into development of new markets and products. Similarly Next has also entered into other businesses which is to be done to diversify the product portfolio. MS and Next Generic strategies: There are three main generic strategies available to all companies including, either become the lowest-cost retailer or differentiate products and services in such a way that it is valued by customers to the extent that they will pay a premium price. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. The case of MSs core products (food and clothing), it implements a focus generic strategy as it concentrates on a narrow segment (a particular buyer group (executives), market segment (high-end), product feature (freshness) and within that chosen segment MS attempts to achieve differentiation from Tescos Asda, BHS, Top Shop etc. The premise is that the needs of the group can be better serviced by focusing entirely on it. Next has also adopted the product differentiation strategy by offer products of higher quality and charging premium price. Thus Next is offering high end products by catering the upper middle social class of the society. GLOBAL STRATEGIC DECISION MODEL When companies enter into international market so they have to take global strategic move in order to gain sustainable competitive advantage. For global strategic decision there are different models. Ghoshal Model: Ghoshal put forward a theory for three types of enterprise in international markets ; Multinational, Global and International. He discussed the strategic competency and structure in Multinational,Global and International Enterprise. Diamond Model: Another model for global strategic decision making was defined by Michael Porters which is known as diamond model. He said that first firms in nations gain competetive advantage in local industry and then compete in international market. He also said that endowment factors of nation help firm to flourish. In his model he also discussed that in order to develop a competitive environment with in an industry there should be rivalry so that firms take more strategic decisions and learn to compete. Marks Spencer can move and set up their outlay in developing countries to where efficient workers and supportive utilities are available to gain advantage of factor condition and also act as supporting wall, have to move in those market where large and potential customer size (like as China, India where they currently operating) to gain demand condition by avoiding ethnocentrism with adoptive firm strategy. They have to practice One-To-All marketing in developing countries to become cost leader in those countries and One-To-One marketing where to perform as quality is matter. NEXT plc obviously to move in developing countries to ensure low cost of production (mainly labor cost), and in large potential market like as in China, India etc. with adoptive marketing strategy but with the think of cost leadership which will create or add value. They have to FDI in global market place other than franchising. M S CURRENT STRATEGY (in recession) Short term Priorities Cost Saving initiatives In global economic downtown and changing in customer needs the company taken major steps to cut down the costs and responding customer needs very quickly. Quality, Value, Service, Innovation and Trust is the prime strategy of MS keeping in mind the firm analysed its position in the last few years and to tackle global challenges the firm draw a new plan is called â€Å"PLAN A† to get in to success. This plan includes cutting down the cost of production, reducing staff, closing down less operative branches and reducing dividends to its shareholders to invest in new business, widening its business activity in the international market, improving performance in food and to retain the leading position in General Merchandising. To improve business performance MS invested in pricing. Delivering the best quality at unbeatable value the MS introduced new promotions in General Merchandising and in Food sector. For example Dress for Less One day Christmas Spectaculars Wise Buys Dine in for Two for  £10 Major Steps in the recession period (Cost Management:) In 2009 the MS closed its 26 less operative branches mostly simply food stores, to cut down the cost. Secondly reduced its Head Office Roles and increased the level of pay for eligible to get pension which is major cost to the company. Changing in Logistics system i.e. merging GM and Food together, Introducing mechanisation in warehouse and Streamlining the international distribution system to reduce cost. The main Objectives Increasing the pace of change and operational execution in the business To become multi-channel retailer focusing customer channels Investing in international business particularly in India, China and Eastern Europe Reinvigorating the brand to customers to highlight ethical and sustainability objectives Future plans: Improving UK Core business Introducing MS Direct Sales (Online) Expanding international business (the revenue in this market is proportionately higher than the UK market) Strengthening UK business Portfolio(modernising and expanding existing system) Integrating Plan A across the business (become carbon neutral CO2 emissions tonnes, Send no operational waste sent to landfill tonnes, Improve energy efficiency in Stores Company Perspectives: (NEXT) Nexts mission is to be the natural choice retailer in the UK for fashion aware men women who expect style, distinction quality from their clothing. Next have a task to build with the main focus of giving all to its customers what they deserve the best. Individuality, long experience, courage in development, and open-mindedness are the tools. The idiom â€Å"the customer is the king† to the company and not simply a kind of making strategy it is tradition. Current Strategy (2009) Concentrate on the design, quality and value of product together with excellent customer service and delivery. The company believe this will serve well through the current recessionary period and it will keep in well place when recovery begins. Controlling cost Controlling stock Continue to invest in the brand Operational cost savings Next found two ways to do the business during recession period. 1). Making the best of current position by providing customers with what they expect. 2) Exciting brand name, beautiful design with great quality in clothing and home ware. 3) Engineering product ranges to lower price points by reducing expense in design and quality. During recession next decided not to devaluate its product for the aspect of pricing nor quality and design of their product ranges, and keep maintaining market position and the company believes that this will provide strong foundation when economic conditions change. To improve the business performance the NEXT introduced pilot data warehouse recording system with its 300 stores to control inventory. REFERENCES: Brews, P. J. and Hunt, M. R. (1999) ‘Learning to Plan and Planning to Learn: Resolving the Planning School/Learning School Debate, Strategic Management Journal, 20/10. Baker, M. (2000), â€Å"Marketing Strategy and Management† 3rdedition, Macmillan Business, London Ghauri, P. and Cateora, P. 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(2000), â€Å"Marketing Strategy and Management† 3rdedition, Macmillan Business, London Next Articles â€Å"Next Trading Update,† inUK Retail Report,May 2000. â€Å"Next Homes in on Bigger Stores,† inIn-Store Marketing,October 2001. Internet http://www.next.co.uk/shopping/homeware#LID=01_02_08 http://www.marksandspencer.com/