Strategic Management at Sainsbury's

Introduction

The word “strategy” is often over-used in a fuzzy manner. Therefore this simple and straight-forward definition of strategy given by William E Rothschild, the business leader and an ex-General Electric veteran is one of the best available. He defines strategy as “What do you want to achieve or avoid? The answers to this question are objectives. How will you go about achieving your desired results? The answer to this you can call strategy.” The highlight of this definition is that it clearly distinguishes strategy from “objectives.”

This assignment examines strategic management at Sainsbury’s, during various booms and busts from the days of its launch till date. The analysis is done within the various conceptual frameworks of strategic management in general and Michael Porter’s five forces model, in particular.

Strategic Management

An articulate, well-laid out and well-executed strategy is the cornerstone of long term prosperity of any business. Strategy operates at various levels, starting with Business or Corporate strategy. Since the ultimate goal of a business is to gain leadership position in one or the other form, business strategy shapes marketing strategy, competitive strategy and growth strategy.

Corporate Strategy

This is an organisation wide strategy that directs and controls the composition of all business activity. It starts with a clear and quantified mission statement. This area is a preserve of top management. Decisions are taken on:

• How resources will be allocated across the organisation
• Portfolio of activities for the firm
• Clear definition of the objectives

One of the key ingredients of good strategic management is organisational leadership and its ability to clarify strategic intent. Driven by vision, it is “an articulation of a simple criterion or characterisation of what a company must become to establish and sustain global leadership.” (Source: Pearce et al pp 340).

Competitive Strategy

In an ideal situation of a monopoly, competitive strategy has no significance. But in reality this is never the case. In near perfect competition, leadership position comes to a business only by gaining sustainable advantage over its competititors. At times this also determines the growth paths that a business should take. For instance, evaluating a move away from core competence into a completely unrelated business, or initiating take-over of another business that can offer synergies.

The five forces model

Michael E Porter proposed the five forces model in 1980 in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors.” In this widely respected and accepted framework he suggests that there are five generic forces that act upon a business irrespective of what industry it operates in. These forces are:

• Competitive rivalry within the industry between existing businesses: The significance of this force in a sector such as the UK grocery retail sector, with large number of players, is the erosion of loyalty because of perceived commoditisation.
• Threat of new entrants: If the barriers to entry are low because of low capital investment or lack of regulation, it can create further pressure with price cutting.
• Bargaining power of suppliers: Leads to lack of control over the supply chain
• Bargaining power of customers: Erodes loyalty and causes switching
• Availability of substitutes: Once again erodes customer loyalty and causes switching. This is a real pressure on UK’s retail sector.

To counter these forces and gain competitive advantage a firm can adopt either or a combination of two business strategies:

• Comparative advantage / cost leadership: This emerges from economies of scale. It is a firm’s ability to source and produce at cost which is lower than its competitors and therefore earn higher margins. It does not necessarily mean offering lower price in the marketplace.
• Differential advantage / differentiation: Is a firm’s ability to create a unique perception about itself vis-à-vis its competitors in the marketplace. It allows a business to cultivate loyal segments of customers.

Sainsbury’s Background

Founded and launched in 1869, J Sainsbury’s PLC has as rich a history as modern London. John James and Mary Ann Sainsbury launched their first store named Sainsbury’s at Drury Lane and quickly expanded to a chain of four shops by 1882.

“Throughout company’s history, the Sainsbury brand has been synonymous with good-quality, well-presented products, with 50 and 60 per cent of the range being sold under the various versions of Sainsbury’s brand.” (Source: Varley). An average Sainsbury’s supermarket today stocks approximately 30,000 products – 50% of which are its own label. The company not only wants to deliver high quality products but also wants to be seen as doing this by its customer. (Source: Thompson et al pp 192).

The mission of revival: In the last decade, the company has lost its leadership position to Tesco and ASDA.. Currently it has between 16-17% market share, and is placed at third position. In 2004, there was a change at the top level. In 2005, its new chief executive clarified the company’s strategic intent by launching an organisation wide revival programme “Making Sainsbury’s Great Again” and announced a mission of increasing sales by £2.5bn by the end of 2007-08.

As a result of this turnaround program, at the end of this financial year, Sainsbury’s “has reported sales growth ahead of expectations.” (Source: BBC New Website)

Competitive strategy: If history of successful businesses is analysed, it will clearly emerge that winners are in the top slots because of the risks they have take. Businesses hungry for long-term success identify gaps and problem areas and attempt to provide solutions to their customers. Leaders at the helm do this with a combination of instinct backed by objective analysis of emerging trends. This is precisely what Sainsbury’s did in an extremely tough economic and social environment during and after the World War II when external forces were threatening its existence. In a pioneering move in the UK market, the grocery chain re-engineered its store operations by adopting the American format of food-retailing. Its first “selfservice” store launched in 1950 immediately after the World War II, when food and other resources required for subsistence were scarce, became a success because it solved a major problem faced by customers – it busted shopping queues. (Source: Sainsbury’s website). Such moves are evident through out its existence and its march towards becoming one of the best known retailers in the history of British business.

Sainsbury’s today: A move towards consolidation and growth

The company plans to focus on three of its core areas: Sainsbury’s Supermarkets, Sainsbury’s Online and Sainbury’s Bank

Steps taken since 2004 in the retailing business:

• Price reduction across a number of products.
• Improving availability.
• Introduction of over 3000 new items.
• Introduction of nutritional labelling branded “Wheel of health” on over 1500 products.
• Introduction of “Try cards” under the slogan ‘Try Something New Today’ built on healthy eating plank. The initiative aims to add value to the food shopping habits and changing food consumption habits. Its success measured by “over 7 million ‘Try’ cards picked up in stores.”
• Engaging its 3500 smaller scale suppliers by launching a campaign “Supply Something.” The initiative is aimed at making local supply chain robust.
• Increasing non-food product categories especially to generate a minimum of £700m sales.
• Initiating community participation programs such as “Active Kids campaign” involving donations of equipment to schools.
• Attempting to become a responsible corporate citizen by setting targets of reducing carbon emissions and introducing re-cycling.

The company has a sourcing office in Hong Kong “Sainsbury’s serves 16 million customers each week in 455 supermarkets and 301 convenience stores across the country. The company employs 148,000 colleagues commited to delivering ‘Great Food at Fair Prices’.” maintains the company’s official website.

All the above activities are aimed towards gaining either diffrential or cost leadership or a combination of both.

The future

There is an increase in sales in the grocery business over the last financial year amounting to Pounds 324 million – a growth of 458.6% over 2006. However financial services that accounts for just 1.7% of the total sales has seen a fall of 11.8% over 2006. The organisation states one of it values as “Getting better Every Day.”

In the current tight economic scenario, Shareholders are expecting most of the retailers to use their real estate assets for generating additional liquidity. But in a move completely reverse of the expectation, Sainsbury’s has tied-up with their lessor British Land.

“Sainsbury’s also announced it was teaming up with British Land to create a £1.2bn joint venture to run 39 superstores across the UK. The supermarket says it will invest £273m into the venture, in which it will have a 50% stake. The stores are currently owned by British Land and leased to Sainsbury for 20 years.” (Source: BBC News Website).

Land is the fundamental element in a large scale retail business and store location, store design and merchandise are all important critical success factors. It can be safely concluded that this recent collaborative move by Sainsbury’s is a deliberate long term. By investing in developing its stores, it can further hope to get a differential advantage over its competitors.