Frame of References
In the frame of references we will present theories and research which has been done previously and which will be applied during our analysis. We will mention re-‐ tailing theory but our main focus will be on competition and strategy theory since this is of most usefulness, considering our purpose. Of special importance for our paper is the work done by Michael Porter who is according to Bailey (2007, p. 48) “a world authority on strategy and competitive advantage”. In order to analyse competition we will use his Five Forces Model. Furthermore, Porter’s three generic strategies will be applied with regard to Coop’s, ICA’s and Bikupan’s positioning strategies in the Swedish organic food market. In addition to Porter’s theories we will also use a SWOT analysis to determine the strengths and weaknesses of the chosen companies and analyse their fit with the external environment.We will not make use of a PESTEL because of the limited scope of this thesis.
There are several different channels retailers can use to sell their merchandise or service to customers. The most common one is the store channel, which does ac-‐ cording to Brynjolfsson et al. (2009) still vastly outsell other channels in most pro-‐ duct categories. The store channel offers a variety of benefits, that other channels do not offer. Many shoppers do not know the exact item they want but rather have a general idea about their wants. In a store they can browse the store and see what is available before they decide what to buy. Furthermore, it is possible to touch and feel products, get personal service by sales associates and decide whether to pay in cash or by credit. The physical presence of a store also limits the perceived risk for customers since they are less worried about the possibilities of returning an article (Levy & Weitz, 2009).
Today, the nterneti has become an important channel over which companies sell their goods and services to consumers. In Sweden 53 per cent of the population bought something over the internet during the last 3 months prior to a survey by the European Commission (Eurostat, 2012) and the tendency is that this will grow even further. Buying over the Internet offers the convenience that it can be done from home. Furthermore, Internet channels often offer a wide variety and informa-‐ tion that can help consumers during the buying process and retailers are able to personalize their offers for the customer (Levy & Weitz, 2009). Nonetheless, ac-‐ cording to Brynjolfsson et al. (2009), the internet channel is mostly used for selling specialized and niche products but struggles to compete with brick-‐and-‐mortar companies when selling mainstream products.
Besides those channels, there are other channels retailers can use to sell their pro-‐ ducts such as personal selling, vending machine, catalogues or kiosks (Levy & Weitz, 2009).
Today, many companies do no longer only use one retail channel but use instead multichannel retailing which is a combination of two or more channels (Levy Weitz, 2009). According to Schramm-‐Klein & Morschett (2006), different channels can offer different advantages to customers and therefore, the total benefit for customers can be larger, especially, when the different channels are well integrated in the multi-‐channel system.
There are several types of retailers operating through store channels. Most con-‐ sumers buy their food in conventional supermarkets even though other types of retailers are becoming more common. Conventional supermarkets are self-‐service food stores which offer all different kinds of groceries and some limited non-‐food items such as beauty products and general merchandise. Hypermarkets are an-‐ other type of retail store which are characterised by being very large and offering a broader variety than conventional supermarkets. Their product assortment consists usually of 60-‐70 per cent of food but also of general merchandise such as hardware, appliances, electronics and furniture (Levy & Weitz, 2009).
Finally, there are speciality stores, selling organic products to customers. Speciality stores are relatively small and serve only a specific market segment by offering a limited number of merchandise categories and usually offering a high level of ser-‐ vice (Levy & Weitz, 2009).
Porter’s Five Forces
According to Porter (1980), five competitive forces shape competition within an industry. These forces are: Bargaining Power of Buyers, Bargaining Power of Sup-‐ pliers, Intensity of Rivalry, Threat of New Entrants and Threat of Substituteo-‐ Pr ducts (Fig. 2-‐1). Porter’s five forces have an impact on costs, prices, as well as required investments of the firms in an industry, and therefore condition industry profitability.
However, Miller (1992), found some additional fields of “uncertainty” that charac-‐ terize an industry. Especially one field is stressed out by Miller to be of importance when analysing an industry. This is the one of “unexpected changes in the demand for the goods or services” that a firm is producing. Such an unexpected change can reshape an industry. “Technological uncertainty” is a further important field to be aware of when analysing an industry, since a firm is uncertain about when its competitors will introduce an innovation to the market. One should be aware of that an innovation can lead to a change in the competitive landscape. This “uncer-‐ tainty” is closely linked to Porter’s force “Rivalry among existing firms” (Miller, 1992).
The German discount supermarket chains ALDI and LIDL found many innovative ways to save money which had a noticeable impact on the food retailing industry and created uncertainties among their competitors. One of this innovations is to leave many of the articles they sell in cartoons rather than placing them on a shelf with the latter taking more time and being more costly. Furthermore, they have a limited assortment which helps them to save space and service costs.
Miller’s (1992) findings are closely connected to Achrol and Stern’s (1988), who stress the point that interdependence among competitors in an industry raises the level of decision uncertainty. This interdependence can be in the form of a shared customer group, such as consumers who buy organic food but who do not care much about the retail store where they buy it.
Depending on the industry and its structure, the strength of the five forces can be stronger or weaker. In most of the industries, only a few of these forces are of im-‐ portance when analysing the industry competition. StonehouseandSnowdon (2007) criticise the fact that Porter implies that the five forces fit equally well to all the firms within an industry. The strength of a specific force depends much more on each individual firm within an industry, rather than the industry overall. This difference might be, among other things, due to differences in firm size (Stone-‐ house & Snowdon, 2007).
Overall, the Five Forces Model helps firms to figure out the most crucial features of the industry structure in order to be profitable in the long-‐run (Porter, 1998). On the contrary, Rumelt (1991) points out that an industry has less impact on a firm’s profitability than firm-‐specific factors do.
Threat of New Entrants
The threat of new entrants relies upon the existing entry barriers in an industry, as well as the reactions which are expected from existing companies in that industry in case of a newcomer. Besides high barriers of entry, strong expected retaliation leads to a low threat of entry. The following barriers to entry are the main ones ac-‐ cording to Porter. However, one should keep in mind that entry barriers can change (Porter, 1980).
-‐ Economies of Scale
-‐ Product Differentiation
-‐ Capital Requirements
-‐ Switching Costs
-‐ Access to Distribution Channels
-‐ Cost Disadvantages Independent of Scale (brand identification, competitors’ experience and networks in the industry etc.)
Porter points out several ways to overcome entry barriers cheaper than competi-‐ tors do. When a firm comes up with an innovative and differentiated product or service, it can direct attention to itself and thus overcome differentiation barriers (Porter, 1980). Low-‐cost airline Ryanair was able to offer lower-‐priced tickets than its competitors and thus overcame entry barriers to the highly competitive airline industry. This was achieved by, among other things, flying to smaller air-‐ ports located further away from major destinations than the big airports. Ryanair found a niche in the market which is another way to overcome entry barriers.
By developing a new way to market the firm’s product or service, such like having offensive marketing campaigns that make people talk about your brand, is a fur-‐ ther suggestion for how to overcome entry barriers (Porter, 1980).
The importance of finding ways to overcome entry barriers is mirrored in Lippman and Rumelt’s (1982) findings, who state that it is difficult for a firm to copy a com-‐ petitor’s successful strategy. This holds even truefor a firm that has total transpar-‐ ency of a competitor’s strategy.
In order for a firm to find out about the reaction of existing firms in an industry, it can pay attention to four characteristics (Porter, 1980). If existing firms have an-‐ swered new entrants with strong retaliating actions, such as price cuts or exten-‐ sive marketing campaigns, a firm can be sure about that it would not be different in the case of that firm entering the industry. Second, the level of resources available to retaliate a newcomer’s entry is a further characteristic that a firm should be aware of. This can be in the form of savings or other unused resources such as power over suppliers. The level of retaliation will also be higher, the more import-‐ ant that industry is for the incumbents. The fourth characteristic is that of slow in-‐ dustry growth which implies that an entrant cannot grow without decreasing its competitors’ market share (Porter, 1980).
Rivalry among existing competitors
Firms in an industry are usually dependent on each other, which implies that ri-‐ valry occurs when, for example, one or several of these firms try to gain a bigger market share. Depending on what the firms are competing on (price, advertising etc.), the industry might be better or worse off. There are numerous indicators in an industry that can give an idea about how intense rivalry is among the firms in that industry, such as slow industry growth, shift in rivalry, lack of differentiation, high strategic stakes or high exit barriers. For example, when the competing firms in an industry are relatively equal in terms of their size, it might lead to a more in-‐ tense fight for market dominance, since they have similar levels of resources avail-‐ able for action and reaction (Porter, 1980).
In order to understand the level of rivalry among firms in an industry, one should also look at the dimension on which competition is based. One dimension can be price, which can have a severe impact on the profitability of an industry. Pricee-‐r ductions by one competitor often lead to retaliation actions by the others and thus can start a price war. Customers tend to focus more on the price of the products and less on its features and services when competition is based on price. Competi-‐ tion based on price often occurs when the products are perishable (Porter, 1980; Porter 2008). Before retailers end up throwing away milk products that expire soon, they try to sell them for a reduced price to capture some of the value.
Another indicator that competition is likely to be based on price is when the products or services being sold by competitors are very similar to each other. Man grocery retailers sell the same food brands to almost identical prices which encourage some of them to cut prices to win new customers (Porter, er1980; Port 2008).
On the other hand, competition that is rather based on dimensions like the level of service or product features such as “locally produced” does normally not have the same negative impact on profitability. This is because these dimensions justifya retailer to charge higher prices and at the same time, customers get more value in return. Therefore, these dimensions can be used to create entry barriers against newcomers and substitute products. A situation where many rivals compete on the same dimensions and target the same customers, zero-‐sum competition can be the result. This means that profitability is decreasing and that all the competitors are worse off. Consequently, positive-‐sum competition is much more likely to occur when every competitor within an industry targets a specific customer group and specific needs in the market (Porter, 1980; Porter, 2008).
Chen (1996) points out that the relationship between pairs of firms should be re-‐ garded when analysing industry competition, rather than ofall a firm’s competi-‐ tors or groups of firms at the same time. This is due to the fact that there are dif-‐ ferences within the market, meaning that some competitors are more similar to a firm and thus a bigger rival.
1.2 Problem Discussion
1.4 Research Questions
2 Frame of References
2.1 Retail channels
2.2 Porter’s Five Forces
2.3, The Components of a Competitor Analysis
2.5 Porter’s Generic Strategies
2.6 Summary of Frame of References
3.1 Choice of method
3.3 Method for analysis
3.4 Evaluation of method
4 Empirical Findings
4.2 Competition in the Swedish organic food market
4.3 Strategic positioning
5.1 Competition in the Swedish organic food market
5.2 SWOT analysis
5.3 Strategic positioning
6.1 Suggestions for further research
List of References
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The Swedish Organic Food Market – A Competitor and Industry Analysis –