Retailers Do Not Operate in a Vacuum

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Table of Contents

Introduction
The threat of entry from potential investors
The buyers’ power
Supplier’s power
Threat of substitutes
Rivalry in UK retail firms
Retailers in the competitive struggle for survival and growth
Conclusion
References

Introduction

Entrepreneurship has resulted in many individuals venturing into different business sectors. One of the business sectors that have experienced rampant growth is with regard to the retailing business. In the United Kingdom, there are many retailers that have ventured into the market. Some of these firms are domestically owned while others are as a result of foreign direct investment. This shows that there is intense competition within the retail industry that the firms face. This makes it evident that retailers do not operate in a vacuum since there are external forces that these firms face. In order to succeed, they have to develop a competitive strategy to enable them to survive within the hypercompetitive external environment. The objective of this discussion is to illustrate that the retail firms do not operate in a vacuum with a specific study of Wal-Mart Supermarket.

The threat of entry from potential investors

In the UK supermarket industry, the is free entry into this sector, this means that potential retailers can venture into the sector without any barriers. The investors are also attracted by the fact that the level of profits within this sector is very high. This makes them perceive a higher probability of acquiring a share of the abnormal profits in the Supermarket Industry. This is due to the fact that the cost that is involved in the process of entry is very minimal (Marketingteacher.com, 2009, para.4). This poses a threat to the firm since it has to deal with the competitor in a fair manner in order for it to survive. In order to cope with the competitive environment, the firm’s management has to formulate and implement a very effective retailing strategy. This would result in increased competition and hence the reduction in profit level.

One of the main sectors that Wal-Mart has concentrated on is with regard to food retailing. In the recent past, Wal-Mart has been facing intense competition as a result of Tesco Supermarket entering this retailing sector. According to a research survey, Tesco retail firm is controlling 30% of the grocery market in the UK. This has resulted in its profit level reaching 3 billion pounds in the last financial year. This shows that Wal-Mart Supermarket is facing competition as a result of other firms entering the sector.

One of the strategies that Wal-Mart Supermarket can use is through formulating a competitive pricing strategy. For instance, the price can be set at a lower margin which means that other firms will be unable to sell at that price since their profit levels will decline. Through this competitive strategy, Wal-Mart can be able to cope with the competition.

The buyers’ power

This refers to the ability of the consumers to influence the price of the commodities that are being offered in the market. This means that the consumers have got a higher bargaining power in the process of setting prices. This is mainly experienced within the economic sectors where there are few firms that are large in size. For instance, within the UK retail industry, the buyer’s power is, particularly in the food retail industry. This is due to the fact that there are few players in this retail sector in the UK.

The consumer buyer power is also enhanced by the fact that there are many suppliers to Wal-Mart Supermarket with regard to food products, especially grocery products. This is due to the fact that there many small farmers who supply large retail firms. Most of the products supplied to Wal-Mart from the small farmers are not differentiated which means that they are not unique.

Supplier’s power

Wal-Mart does deal with other products apart from food products. Due to the development within the production sector, there are many firms that are involved in the production of retail products. This means that there is competition within the retail producing firms. Wal-Mart has got its own suppliers for the products it deals with. Due to increased competition in the UK supermarket industry, the other firms have got their own suppliers. This makes it possible for the other firms to stock competing products that are supplied by different suppliers. These suppliers of the competing products influence the process of Wal-Mart in setting prices of the products it sells to the consumers.

In certain cases, the suppliers come together through the process of aggregation. Through this process, it is possible for the suppliers to influence the supply chain to the UK retail firms. Wal-Mart deals with (Yuval, 2005, para.2).

Threat of substitutes

In the recent past, there has been the emergence of a large number of substitute products in the UK food retail market. This has an effect of reduction of the level of profits made by Wal-Mart. This is mainly so due to the emergence of am Community Food Retailing Cooperative in the UK. The cooperative is retailing a diverse range of food product substitutes. (Kelly, 2006, Para. 10).

Rivalry in UK retail firms

UK retail industry is characterized by a high degree of rivalry. This is due to the increase in the competitors who are seeking a higher share of the market. Within the food retailing industry Wal-Mart has experienced rivalry from other firms such as Morrison, Waitrose, Spark & Spencer’s amongst others. The rivalry is intensified by the fact that the consumers of grocery products have an option of the stores from where to obtain their products (Tesco Min submission to the competition commission: an inquiry into the UK grocery retailing market, n.d, p. 3).

Retailers in the competitive struggle for survival and growth

The secret of a firm’s survival in its market of operation is the development of competitive advantage. This will enable that the firm is able to survive while at the same time it experiences growth in terms of profitability and scale of operation.

Cost leadership

In the current retail environment, most retailers are faced with the challenge of dealing with competition. This is in their effort to increase their rate of growth and hence the chances of survival within the market. Amongst the strategies that the retail firms are using includes the adoption of cost leadership which involves obtaining the products from the suppliers at a lower cost (QuickMBA.com 2009). This advantage is passed to the customers by selling at a lower price. For instance; Tesco is currently concerned with being influential in the supply chain. This is through the adoption of a strategy that enables it to acquire its food products at a low cost from the suppliers. The result has been an increase in the firm’s customer base culminating in an increase in the firm’s level of profit. This is evident from the fact that Tesco has a market share of 30% within the UK grocery market. Other firms in the market have been trying to challenge the pricing strategy of Tesco by adopting a strategy of rapid cutting of the prices especially during the current economic recession in order to maintain their market share. This is a perfect example of price war amongst firms in the UK retail market. In the effort of Tesco to effectively maintain its low-cost leadership strategy; it has ensured that its distribution channel is effective. This is through the incorporation of the just-in-time strategy. This enables that the suppliers are able to deliver the products to the firm efficiently.

Product differentiation

In order to cope with the increased competition, the UK retail firms have heavily invested in product differentiation. This enables these firms to incorporate value addition to the products that they offer in the market. This means that the customers perceive the products offered by the particular firm to be of more superior value than the competitors. By adding value to the products, the firms are able to incorporate the value-added in their pricing strategy. This is by adding a premium on the price of the products which means that the level of profit is boosted hence increased growth.

Franchising and alliances

Considering the intense competition in the business environment, the management of retail firms has incorporated the concept of franchising. This is a method of conducting business whose objective is to establish a significant market share by the firms (What is franchising 2001).

Through franchising, a particular retail firm creates a unique image in the mind of the customers with regard to its mode of operation. It is a very important retailing strategy in the process of the firm conducting its expansion strategy. This is due to the fact that the potential customers are able to identify the firm’s brand. Retail firms deal with a wide range of products but a particular chain deals with a single line of products (Renata & Francine 2006). This enables these firms to deal with a wide range of product brands that the customers have already identified to be of value. This makes it possible for retail firms to undertake product differentiation.

For franchising to be effective, firms form a strategic alliance with firms that are related to their business operation and whose sole objective is similar. In the UK retail market, most of the firms in the food retail market have adopted this strategy in order to succeed for instance Pizza and Subway’s retail firms (Renata & Francine 2006).

Conclusion

There are external forces that the businesses face resulting from sources such as increased competition. Competition is a challenge that the retail firms have to deal with in the external environment and results in rivalry amongst firms. This is due to the fact that other investors are attracted to the retail sector of the economy due to the increased profitability. These external forces include the threat of entry, supplier’s power, buyers’ bargaining power, the threat of substitute products, and rivalry.

The retail firms in the UK are competing in their effort to experience growth and also for survival purposes. This is evident from their formulation and integration of various retailing strategies such as franchising, cost leadership, and product differentiation.

Franchising enables these firms to attain a significant market share hence dominating the retail market. Franchising amongst these firms is being enhanced by the concept of forming a strategic alliance. With regard to cost leadership; these firms are devising strategies on how they can develop powers in order to influence the supply chain. This will enable them to obtain their supplies at a relatively lower price which they pass to the consumers. This benefits the firms in terms of the increase in the size of their customer base. In order for their products to be unique, these firms are adopting the concept of differentiation. This results in value addition to the firms’ product which makes the customer perceives that they are getting value for their money. This is incorporated in the firm’s pricing strategy.

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