Strategic Analysis: The Case of Sainsbury’s Plc

Introduction

This paper moves away from providing a theoretical perspective of strategy by engaging in the practical analysis of the corporate and business strategy of Sainsbury’s Plc; currently the second largest chain of supermarkets in the UK.

Sainsbury’s, established in 1869 as a shop in London, soon became the largest grocery retailer in the country and pioneered the concept of self-service retailing (Sainsbury’s Plc, 2018a). It was overtaken by Tesco in 1995 and Asda in 2003 in sales revenues (BBC News, 2003). The company however regained its second position in 2014 and currently has a market share of 15.6% in the UK.

Sainsbury’s long-term vision is to be the most trusted retailer in the UK, where people love to work and shop (Sainsbury’s Plc, 2018c). The firm aims to achieve this by putting customers at the heart of its business and investing in stores, colleagues and channels to offer the best possible shopping experience (Sainsbury’s Plc, 2018c). It has developed specific value systems and is committed to providing nutritious and healthy food for shoppers (Sainsbury’s Plc, 2018d, n.p). Sainsbury’s has 5 specific priorities:

• Further differentiation through food quality
• Engagement of increasing numbers of shoppers through useful advertisement and communication in a more engaging way
• Delivery on value through various means, particularly aimed at helping customers with lower prices
• Development and improvement of online channels
• Integrating Argos, which has recently been acquired by the firm, into the organisation (Sainsbury’s Plc, 2018e).

Notwithstanding the recent success achieved by the organisation, Sainsbury’s has been experiencing major marketplace difficulties on account of the financial crisis of 2008, the Covid 19 Pandemic and the continuing economic downturn (Peston, 2014). The downturn has drained money from shoppers and created great price consciousness; it has affected sales and profits. It has also driven the growth of discounters like Aldi and Lidl, who have been able to achieve significant market share at the cost of large supermarket organisations like Tesco, Sainsbury’s, Asda and Morrison.

Application of Chosen Models

This section analyses Sainsbury’s micro and macro-environment with the help of a combination of three chosen strategic models, the PESTEL Analysis, the Porter’s Five Forces Analysis and the SWOT Analysis.

Evaluation of Strengths and Limitations of Chosen Models

The Five Forces model is widely used for analysis of industries and environments, but suffers from a few limitations. The model assumes that the market is classically perfect and relatively static. It does not take account of strategic alliances and is best applicable for the examination and analysis of comparatively simple market structures. Its application becomes difficult in complex business sectors with multiple interrelationships, by-products and product groups. Technological breakthroughs and aggressive market entrants can alter business models, relationships and entry barriers that are considered in the five forces model (Johnsonet al., 2014, p82). The entry of Aldi and Lidl in the UK supermarket sector has, for example, radically altered the extent of competition within it.

The use of the PESTEL analysis also has some disadvantages and limitations, even though it has proved to be useful in macro-environmental analysis. The PESTEL analysis often does not provide the full picture and leaves gaps. Significant and swift shifts in any of the six factors can result in the irrelevance or obsolescence of the process. The conducting of a PESTEL analysis requires access to substantial data and absence of such information can result in the use of unnecessary assumptions and the generation of wrong outcomes (Ansoff & Nakamura, 2007). The use of the PESTEL and Five Forces tools should be done with care and with the understanding of their limitations.

Porter’s Five Forces Analysis

The application of the Porter’s Five Forces model helps in the assessment of the competitiveness of an organisation’s microenvironment with the help of five specific factors, namely the power of buyers and sellers, the threats from substitutes and new entrants and rivalry between market participants (Porter, 2008).

Power of Buyers

Supermarket shoppers in the UK have several alternatives to choose from for grocery purchases. There are four leading supermarket chains, namely Tesco, Sainsbury’s, Asda and Morrison, apart from discounters like Aldi and Lidl (who have achieved a combined market share of more than 10%). The UK also has approximately 18,000 standalone retailers dealing in groceries and other household items. Whilst organisations like Tesco and Sainsbury have been able to improve customer loyalty through specific schemes, the development of the financial crisis, the Pandemic and the economic downturn has made buyers price conscious and eroded old loyalties. The brand strength and individual benefits of different supermarket chains influence customer purchasing behaviour, but UK customers are increasingly moving towards economically priced products of good quality. The strengths of buyers can be considered to be medium to high.

Power of Suppliers

The major supermarket chains are large buyers and wield substantial purchasing power on account of the scope and volume of their purchasing. Most suppliers to these chains deal in a variety of foodstuffs and are eager to do business The supermarket chains make use of their bargaining power to control the terms of sales and get favourable payment terms. The power of suppliers is considerably low.

Threats from New Entrants

The establishment of a new supermarket chain is likely to involve substantial investment in space, capital and retailing infrastructure (Deloitte, 2014). These barriers are considerable and likely to reduce the possibility of new entrants coming into the market. Notwithstanding such barriers, two major discounting chains, namely Aldi and Lidl have not only entered the UK supermarket space, but have also brought about significant changes in consumer buying patterns through their economically priced goods (The Week, 2017, n.p). Whilst the numbers of individual retailers has reduced significantly over the years, this sector also periodically experiences new openings. The threats from new entrants appears to be medium.

Threats from Substitutes

Supermarket chains are long established in the UK and operate through various formats (Wylie, 2015, n.p). The primary threat from substitutes is likely to occur in the online space with purely online organisations like Amazon, increasing their presence in the market for retailing of groceries and household goods (Redman, 2018, n.p). Most supermarkets are responding to these threats by developing their online sales channel (Wylie, 2015, n.p). Sainsbury’s has invested significantly in online sales (Tan, 2017, n.p). The threat from substitutes can thus be considered to be medium to high.

Rivalry between Market Participants

Whilst the supermarket sector in the UK has traditionally been oligopolistic, this situation has been disturbed by the entry of the discounters (Wylie, 2015, n.p). The sector has become intensely competitive on account of the downturn in the economy, the impact of Brexit and the activities of the discounters (Chu, 2018, n.p). Most organisations in the sector are engaging in fierce competition, including the reduction of rates. The intensity of competition in the sector can thus be considered to be high.

With the strength of buyers, the threat from substitutes and market rivalry between participants being high, it can be concluded that the supermarket sector in the UK is extremely competitive. Strategic responses from organisations have to take this fact into account.

PESTEL Analysis

The conducting of a PESTEL Analysis involves the examination of the Political, Economic, Social, Technological, Environmental and Legal elements of the organisational environment and its various strategic implications (Ansoff & Nakamura, 2007, p72).

Political

The political environment of an organisation has immense strategic implications. Whilst multinational corporations frequently have to deal with the political dispensations of their various host markets, The political environment in the UK has by and large been stable and pro-business, even though the contemporary environment appears to be volatile on account of Brexit and the fallout of the Covid 19 Pandemic. Sainsbury’s organisational management has to absorb the implications of these political changes and take appropriate strategic decisions.

Economic

The economic environment of the UK has been difficult since the development of the financial crisis in 2008 and the consequent economic recession. The Covid Pandemic increased unemployment, reduced spending power and subdued customer activity. It helped to drive the sales and market share of discounters like Aldi and Lidl, even as long time customers of chains like Tesco and Sainsbury’s switched loyalties and started patronising discount stores; driven by their more economically priced goods and services. The economic environment was further impacted by the sharp decline in the value of the pound, increased costs of imports, especially from the European Union and very little of export gains. Such developments have increased the pressure on supermarket chains like Sainsbury and motivated them to reduce their prices, which in turn has adversely affected their profitability.

Social

Consumer buying behaviour has been impacted substantially by social changes and the Covid 19 Pandemic. Whilst the UK has in the past been affected by the breakdown of the joint family, the growth of nuclear homes and increases in the number of single-parent families, it is currently experiencing an ageing process. The average age of the UK population is increasing steadily. The proportion of people in the age group 65 and above is growing with every passing year and the elderly segment is increasing in importance for supermarket operators. UK supermarkets have to bring about changes in their product range and their internal environment to attract people from older age segments. Recent years have also witnessed significant changes in consumer lifestyle and an increasing preference for online transactions and healthy, organic and natural foods.

Technological

Technological advances have impacted practically all business sectors. Whilst modern supermarkets have adopted modern technology in supply chain management, logistics, transportation and in-store operations, supermarket operations have been fundamentally affected by the growth in online sales and the entry of online suppliers like Amazon. The online segment is growing rapidly, especially after the Covid 19 Pandemic; as customers increasingly prefer to order from their homes and receive deliveries at preferred places. Supermarkets have to respond to such changes in the marketplace.

Environmental

Modern customers prefer to patronise organisations with sustainable business models. Environmental laws, rules and regulations are being tightened to enhance the safety, security and protection of the environment. Supermarket leaders sector are taking several initiatives in areas like reduction of waste, conservation of energy and assistance to the community in order to improve the sustainability of their operations.

Legal

All business organisations must work within the ambit of the law. Organisational managements must take cognisance of the various laws, rules and regulations of their operational and business environment and carefully adhere to them. The failure to do so can result in significant penalties, fines and other adverse repercussions.

SWOT Analysis

The conduct of a SWOT analysis helps in the identification of organisational strengths, weaknesses, opportunities and threats. The SWOT analysis of Sainsbury’s is provided below.

Table 2: SWOT Analysis

(Source: Sainsbury’s Plc, 2018a, n.p; The Week, 2017, n.p; Partington, 2018, n.p; Chu, 2018, n.p)

Identification of Significant Strategic Issues

The examination of the organisation’s environment has helped in the identification of organisational strengths, weaknesses, opportunities and threats. The emergence of Aldi and Lidl has increased the competitive threats faced by the organisation. Such an examination has resulted in the identification of two specific and significant strategic issues, which are taken up for elaboration in this section.

The first important issue that needs to be addressed is the organisational capability for reduction of costs and development of cost leadership in order to respond to the various threats posed by the Covid 19 Pandemic, economically difficult conditions, lower purchasing power with customers, and continued intensely competitive activity from the discounters. Sainsbury’s operations in recent years have witnessed significant reduction in profitability on account of organisational limitations and inadequate cost control. The organisational management has to look at various options and take specific strategic decisions in order to generate cost efficiencies and establish cost leadership.

The second area of strategic significance is online sales. Online sales are increasing with every passing day and the online segment has become the fastest growing segment in the supermarket sector. Pure online grocery retailers like Amazon are increasing their activity and consumers are increasingly displaying tendencies to engage in the online purchase of groceries and other items. It is in this context essential for modern supermarkets to treat online sales as a critical strategic imperative and increase online business.

Implementation of Strategy

Sainsbury’s has been trying to improve cost reduction and achieve cost leadership through the identification of high-cost areas and their subsequent control. The organisation has initiated action for cost identification, minimisation and elimination; especially in areas of supply chain management. It is suggested that the firm should make strenuous and intense efforts to identify various areas of cost reduction and reduce costs. Sainsbury’s has taken initiatives to reduce and close unproductive retail outlets. Care should be taken to ensure that closure of such outlets does not result in a harmful reduction in retailing capacity.

Sainsbury’s merger with Asda, the third largest supermarket chain in the will generate considerable cost savings, which will enable the firm to reduce its prices, compete effectively with the discounters, increase sales and improved profitability. The firm should realise all the merger synergies as effectively as possible to ensure high levels of cost-effectiveness.

Sainsbury’s must draw out and implement strategic plans for increasing its presence in the online space across the country. This will help the organisation in enhancing its market share and its profitability.

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Appendix

This appendix contains details about the three analytical models chosen for this exercise, namely the PESTEL analysis, Porter’s Five Forces model and the SWOT analysis. The PESTEL analysis is a widely used tool for the examination of an organisation’s macro environment (Johnson et al., 2014, p38). It involves the examination of the political, economic, social, technological, environmental and legal elements of an organisation’s macro environment. It is widely acknowledged that the macro environment of an organisation can play an extremely strong role in the formulation of an organisation’s strategies and objectives because the activities of a business can be influenced by various environmental trends and developments (Ansoff & Nakamura, 2007, p72). It is thus critically important to examine environmental factors in order to assess and examine their organisational implications from different perspectives. The financial crisis of 2008, for example, hurt the operations of most retailers in the UK and resulted in reduction of customer footfalls and greater interest in economically priced goods (Smithers, 2017, n.p).

The ongoing uncertainty about Brexit has also resulted in adverse business implications for most UK retailers (Partington, 2018, n.p).
Continuous technological developments also have substantial implications for the working of supermarkets (Chen, 2017, n.p). The enormous spread of the Internet has resulted in enormous increase in e-commerce activities and has opened up an entirely new channel for modern organisations, including supermarkets (Crowe, 2018, n.p). Online sales are now the fastest growing sales channel and provide enormous opportunities to supermarket chains to access and service customers (Chen, 2017, n.p). It is, however, important to keep in mind that all macro-environmental factors may not be equally important and relevant for all business organisations. It is thus important for strategic managers to carry out a PESTEL analysis with care and identify the relevant and important macro-environmental factors, rather than concentrating equally on all of them.

The application of the Porter’s Five Forces model on the other hand helps in the examination and analysis of the microenvironment of an organisation through the analysis of five specific forces, namely the power of buyers, the power of sellers, threats from new entrants, threats from substitutes and the extent of market rivalry between market participants (Grant, 2010, p50). There is wide agreement on the fact that the various elements of an organisations micro-environment differ from each other in various ways (Ansoff & Nakamura, 2007, p77). The power of buyers can for example be extremely strong where choice is extensive and a number of organisations operate in the market (Wylie, 2015, n.p). It can, on the other hand, be very low where the market is monopolistic or oligopolistic in nature and customers do not have much choice in the selection of their suppliers (Deloitte, 2014, p5). The threats from new entrants are likely to be low, when there are several entry barriers, like in the case of capital-intensive or technology-intensive business areas. The threat from new entrants may, on the other hand, be quite high in business areas like restaurants, where entry does not require high technology or capital investment (Deloitte, 2014, p6). It is thus important to consider the various facets of an organisation’s microenvironment in order to determine the extent of its competitiveness.

The Porter’s Five Forces model has, however, been subjected to substantial critique by experts, who feel that its primary weakness results from the historical context in which it was developed (Grant, 2010, p49). The model assumes a classic perfect market and becomes less effective with greater regulation of industry (Ansoff & Nakamura, 2007, p80). It is also useful for the analysis of simple market structure and a comprehensive description of all the five forces becomes quite difficult in complex industries with multiple inter-relationships (Porter, 2008). It is thus important to use the five forces model carefully and in conjunction with other analytical tools like the PESTEL analysis and the SWOT analysis to develop a comprehensive situational analysis of an organisation.

A SWOT analysis is a comprehensive analytical tool that focuses on the identification and examination of four inter-related environmental factors, two of which, namely strengths and weaknesses are internal, whereas the other two, namely threats and opportunities are external (Grant, 2010, p52). The conduct of a SWOT analysis can help organisational managers in the identification of various environmental opportunities and the ways in which they can be exploited with the help of organisational strengths (Johnson et al., 2014, p40). It can be considered to be a foundational assessment model that engages in the measurement of what can and cannot be done by an organisation, as well as its potential threats and opportunities. It can help in the identification of organisational weaknesses and threats, as also their implications for the success of organisational implementation of the strategy. It helps in the discussion of an organisation’s core strengths and weaknesses and thereafter in defining opportunities and threats. It can be used for the evaluation of strategies, as well as investments (Ansoff & Nakamura, 2007, p83). A SWOT analysis, however, does have some specific limitations. A SWOT analysis focuses on only four primary functions and substantially more information is required for the making of business decisions (Grant, 2010, p52). It also does not help in the prioritisation of issues and can become extremely subjective without the right information. It is thus extremely important to refrain from depending upon only one of these analytical tools. It is important to make use of all of them in totality and thereafter arrive at a reasonably comprehensive understanding of the total organisational situation in order to form, assess and evaluate strategies.