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Strategic Planning Of Primark

3195 words (13 pages) Essay in Marketing

15/05/17 Marketing Reference this

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Strategic planning is the whole process of determining and formulating the strategy of the organization. Strategic plan decided the goals and objectives of the organization; lays the roadmap of how to achieve those goals and objectives and decides on the efficient and effective allocation of resources to achieve the strategic objectives of the organization. Strategic planning addresses the following three questions:

By the year 1973, Primark had opened four out-of-town stores in Great Britain. In 1984 it made its first major acquisition of five Woolworth stores in Northern Ireland.In 1995 it acquired BHS one-up discount chain. In 1999 it acquired 11 properties from Co-op, including Reading. In 2000 it acquired 11 UK stores of C & A. In 2005 it acquired six stores from “Allders”. In the same year it acquired 41 stores of Littlewoods. In 2006, it expanded into Spain and opened its first store there in Madrid.

In December 2008, Primark entered the Netherlands market. In May 2009, the company also opened its stores in Portugal and Germany. In December 2009, the company opened its first store in Belgium.

By December 2009, the company had 196 stores. 138 of these stores are in UK and 38 are in Ireland. Primark employs more than 12000 people.

STRATEGIC PLANNING HISTORY OF PRIMARK

Primark is one of the many retailers of affordable fashion clothing in UK. There is high intensity of rivalry among competitors. To sell cheap fashionable clothing in this scenario is a very challenging task.

Primark has a tightly defined target segment of consumers in the below 35 age group. It is pursuing cost leadership as it offers fashionable clothing at very affordable prices. Companies can achieve more than normal rates of profits in two ways: by establishing cost leadership or through establishing product leadership. Cost leadership is attained by giving the same products at lower prices than competitors. Product leadership is established through strong product differentiation so that customers are ready to pay a premium price for the products.

Primark has adopted the earlier strategy of cost leadership. This strategy is pursued by companies selling affordable products across all sectors. The same strategy was pursued successfully in the aviation sector in United States by Southwest Airlines.

Primark also has a family of brands. It is not heavily into branding. For maintaining its low costs Primark focuses more on buying, logistics and supply chain management. A separate team has been set in UK that travels all over the world to identify new fashion trends and seek cheaper supplies. The company sources the manufacturing of its clothes to developing countries like India which have cheap labor. This results in huge cost savings for Primark.

Primark also has the strategy to reduce the time-to-market to as less as possible. For this purpose the company uses computerized customs clearance. It has a strong warehousing and distribution network. A giant warehouse run by TNT is dedicated exclusively to Primark stock distribution.

For rapid restocking of fast selling items the computerized warehousing and distribution systems are linked to computerized daily sales and stock information.

Primus has also grown inorganically over the years. It has made a series of acquisitions. For sustaining this cost leadership strategy the company has to maintain high efficiency levels and tight cost controls on a continuous basis.

WOOLWORTHS

Woolworths’, the high street retail chain that collapsed in 2008, was founded in 1909. Since then it had grown into a chain of about 800 stores. But the recent history is one of trials and tribulations that ended in entering into administration in November 2008.

The retailer faced intense competition from supermarket chains like Sainsbury, Tesco etc. Lately it had entered into entertainment and electronics retail after its acquisition of Entertainment UK.

In September 2008, Woolworths announced a pre-tax loss of pound 99 million for the six months ending on August 2, 2008. The company then embarked on a turnaround plan. It decided to sell 120 stores, axe about one-fourth of its products from the stores , reduce web operations and cut jobs.

In 2008 the financial crisis brought a severe credit squeeze. The company’s banks, GMAC and Burdale decided to recall their loans. The company that was burdened with debts worth pound 385 million had to enter administration. By January 2009 all 807 Woolworths stores in UK were closed. But Woolworths was more a casualty of its flawed strategic planning than the economic recession.

STRATEGIC PLANNING AT WOOLWORTH

Woolworths’ strategy had no target segment or focus point. It lacked a single Unique Selling Proposition ( USP).Its product leadership was in the pic ‘n’ mix sweets. In other product segments like music, books toys etc it was neither a product leader nor a cost leader. (Chandler 1990)

Even in the children’s clothes and school uniform segment it soon lost its leadership to retailers like Asda and Tesco. Woolworths’ strategy had always been to achieve cost leadership. The original US chain founded by Frank Woolworth sold everything at 5 cents. When the chain opened its first store in UK in Liverpool, every item was priced below 6 pence.

Woolworths pursued successfully this ‘cost leadership’ strategy for many years after that. It reached its peak in the 60s and 70s. The company hardly spent anything on branding. Its stores were without frills.

But lately the company lost its cost leadership to discounters like Wilkinsons, Tesco etc. Almost anything that it sold now, the competitors were able to sell at a lower or at least the same price.

Woolworths was also using a lot of debt or leverage in its capital structure. It was also using debt to open new stores. While it was opening new stores, many of its existing stores were in mess.

Another part of Woolworths’ strategy, right from the beginning, was to sell a variety of merchandise. In its early days the chain was able to undersell its competitors through mass production. This strategy worked so well that at one point of time Woolworth was opening one new store every seventeen days.

The IPO of Woolworths in the London Stock Exchange was so successful that for just 15% offloading of its equity in Woolworths UK, the parent company was able to give its shareholders a dividend of 90 cents for every dollar worth of their shares.

During the World War-2 the company suffered badly with many of its stores bombed and destroyed during the air raids. Prominent among them was the bombing of the New Cross High Street store in which 160 people were killed. The post-war inflation forced it to give up its “under six pence” strategy. (Cooper 2003)

Woolworths then capitalized on the pop mania of Beatles. It made a fortune selling the Beatles’ merchandise like dolls and other mascots. It followed this by expanding its entertainment offerings.

For opening new stores, Woolworth was taking the real estate on rent or lease. At the last count it had about 700 landlords. Its lease payments were rising at the rate of 2.5% per year. Its rent bill had soared from pound 70 million in 1998 to pound 160 million in 2008. So when the credit crunch and the recession started, Woolworths had no fixed assets to fall back on.

After its demerger with Kingfisher in 1982, Woolworths aimed long term growth through operating the following: (Coulson 2004)

Hypermarkets.

The Big W stores.

Woolworths general stores.

Streets online.

But the company soon reversed its strategy, discontinued the above three stores and started focusing once again on its traditional strength products like confectionery, toys and entertainment.

But in spite of narrowing its focus in order to cut costs, Woolworths was not able to match competitors like Wilkinson and Poundland which ate into its market share. Even in the range of product offering, it proved to be no match to Tesco.Its price points were higher and it also lost out on the convenience quotient.

When all its strategies failed to bring a turnaround it approached the restructuring specialist Hilco. Hilco agreed to buy Woolworth for a nominal sum of pound 1 and take pound 300 million debt of the retailer. But at the last minute the deal was thwarted by its lenders, Burdale and GMAC. This led the retailer into administration in November 2008, just before the peak Christmas season. (Fifield 1998)

COMPARISON AND CRITICAL ANALYSIS OF THE STRATEGIC PLANNING OF PRIMARK AND WOOLWORTHS

The strategic plan of Primark consisted of the strategy of growing inorganically as well as organically. For inorganic growth it made strategic acquisitions. For its organic growth the company successfully pursued cost leadership. It was also successful in churning out fashionable clothes that were up to the latest trends. And it churned these at very affordable prices. It did so through strategically using outsourcing and having an integrated supply chain that was extremely fast in delivering. It has a much focused target segment of consumers. (Fleming 2009)

If we conduct the SWOT analysis of Primark, we get the following:

Strengths- Its cost leadership and its supply chain and logistics processes. These have become a source of competitive advantage for the company.

Weakness- It is not into branding. Lack of having brands with high brand equity may hurt its profitability in future. Excessive reliance on outsourcing for manufacturing and supply chain processes make it dependent on suppliers and vendors.

Opportunities- There are huge opportunities for retailers of discount fashion clothing. The recession has reduced the disposable income and the consumers have become more value conscious.

Threats- The company has recently come under the attack of anti-poverty campaigners for the sweat shops in Bangladesh and India. The company is fighting off its reputation of being an unethical company driven solely by the lust for more profits. On the competitive front it has tough competition in the form of Marks & Spencer, Debenhams etc.

FIVE FORCES ANALYSIS OF PRIMARK

Threat of competitors or intensity of rivalry- The competitive rivalry is reasonably high in the discount fashion segment.

Threat of substitutes- The threat of substitutes is high. Fashionable clothes have a large number of substitutes.

Bargaining power of suppliers- Discount chains like Primark use a lot of outsourcing from developing countries like India, Bangladesh etc. The bargaining power of these suppliers is low as they are dependent for their revenues on large clients like Primark.

Bargaining power of customers- The bargaining power of customers is high. Customers of discount chains like Primark are bargain hunters who look for the best bargain. (Oakland 2003)

Threat of new entrants- To produce fashionable clothes at the lowest prices is quite a challenging task. This raises naturally a high barrier to entry. Thus the threat of new entrants is significantly lowered.

CORE COMPETENCY OF PRIMARK

Core competency is that capability which is central to the existence of a business or corporation. A capability or set of capabilities qualify as core competency if they have the following attributes: (Peter 1989)

It is the source of value proposition to the customers.

It is difficult for competitors to acquire similar capabilities.

The capabilities can be leveraged across different products and markets.

The core competency of Primark is to produce fashionable clothes for as low prices as possible. It has been able to do so through entering into strategic partnerships with companies like TNT logistics and outsourcing manufacturing to cheap offshore locations like Bangladesh.

VALUE CHAIN ANALYSIS OF PRIMARK

The value chain of any organization is divided into two types of activities:

Primary activities.

Secondary activities.

The primary activities of the value chain comprise the following:

Inbound logistics.

Manufacturing.

Outbound logistics.

Marketing and Sales.

Services.

The secondary activities include:

Human Resource Management.

Technology support and research and development.

Procurement.

Primark has been able to gain and sustain competitive advantage by focusing on inbound logistics (supply chain), outbound logistics (distribution network), manufacturing (outsourcing to cheaper destinations), technology support (computerized supply chain and distribution connected to point of sales). (Pride, Hughes, & Kapoor 2009)

As far as its marketing strategy is concerned it has responded to the 4Ps of the marketing mix in the following ways:

Product- It has been able to understand the latest trends in fashion. A team of experts travels across the globe and monitors new trends in fashion.

Price- The company has been able to deliver the products at very low prices.

Place- Primark has an effective distribution network. Its stores are located strategically.

Promotion- Primark does not spend too much in branding or promotions.

Woolworths, on the other hand, lacked a clear strategic plan. It seemed to be bungling with its strategy. It made many strategic experiments, all of which failed to sustain the 99 year old chain.

The SWOT analysis of Woolworths, done retrospectively, reveals the following:

Strengths- A ninety-nine years old brand name and a reasonable number of loyal customers. It has a very high brand recall and brand recognition.

Weakness- It has no target segment. It lacks product leadership as well as cost leadership. It is trying to sell too many products and is competing across too many categories.

Opportunities- The opportunities for discount retailers are always high, especially for high street retailers like Woolworths.

Threats- The threats are many. It is using too much debt. It is into too many lease agreements. Most of its stores are on rent. It lacks fixed assets to fall back upon.

FIVE FORCES ANALYSIS OF WOOLWORTHS

The five forces analysis of Woolworths, if done just before its collapse, reveals the following: (Robert 2008)

Threat of competitors- Formidable competitors in the likes of Wilkinson, Tesco etc. Wilkinson and Poundland are especially threatening as they are eating into the share of Woolworths.

Threat of Substitutes- The threat of substitutes is high in the retail industry.

Bargaining power of the customers- The intensity of competition, the business model to offer products at discounted rates; all serve to increase the bargaining power of customers of a chain like Woolworths.

Bargaining power of suppliers- The bargaining power of suppliers is not that high. But since Woolworths was operating on rented real-estate, the bargaining power of landlords (suppliers of real estate) had increased tremendously. The annual rise in the rate of rents of Woolworths was 2.5%.

Threat of new entrants- The capital intensive nature of the business raises barriers to entry. Thus the threat of new entrants is not that high.

CORE COMPETENCY OF WOOLWORTHS

The core competency of Woolworths had been once its capability to offer the lowest cost products in categories like children clothing. It also enjoyed product leadership in pic ‘n’ mix sweets which it continued to enjoy till its very last days.

VALUE CHAIN ANALYSIS OF WOOLWORTHS

The key to maintaining cost leadership is managing the value chain activities well. Woolworths failed to manage these value chain activities as well as competitors like Tesco, Poundland etc.It was unable to get the lowest cost supplies. Its distribution (outbound logistics) was such that was unable to enhance its convenience quotient. During its hey-days the company was efficient in large scale manufacturing that enabled it to get lowest cost products through economies of scale. Later on it failed to manage this value chain activity as well. Because of the mismanagement of its value chain activities, Woolworths soon lost its competitive advantage.

Primark was able to execute the “how” question of its strategic plan well. It was able to have such processes that enabled it to achieve its objectives. Woolworths failed on both “what” and “how” aspects of strategic planning. It lacked vision about where it wanted to reach in future. And since it did not know where to go (goals and objectives), it also did not know how to reach there. Its strategy was like groping in the dark. It was opening too many stores on debt; it had no target segment and finally it was dealing in too many products. As a result both diseconomies of scale and scope had set in. (Sheshinski, Strom, & Baumol 2007)

OUTCOME OF THE TWO COMPANIES

The outcomes have been starkly opposite for both the companies. For the year to 12 September, 2009, Primark’s sales jumped by 20%. Its profits were up by 8% to pound 252 million. The company has acquired the nicknames of Primarni or Pradamark because of its ability to sell catwalk fashion at rock bottom prices.

In the recession hit economy of UK, which has entered its six consecutive quarter of GDP contraction, Primark has increased its retail space by 9%. It opened six new stores in UK since the recession started.The chain also contributed 40% to the profits of AB foods which is its holding company.

Its stores in the continent are also performing well, especially those in Germany. To support its high rate of growth during recession, Primark opened a new distribution centre in Thrapston, Northampton shire.

On the other hand, the recession proved to be the final nail in the coffin of Woolworths. Its debt of pound 340 million proved to be too much. All efforts to salvage it failed when its lenders, GMAC and Burdale, recalled their loans. In November 2008 it entered into administration. Neville Kahn, Dann Butters and Nick Dargan of Deloitte were appointed joint administrators. On 26th November 2008, trading in the Woolworth group’s shares was suspended.

The 807 stores of Woolworths were closed in phases. In the last days, the stores offered discounts as high as 90% in order to dispose of their merchandise. Some of the stores have been reported to have sold their fixtures and fittings also. 207 of these stores closed two days after Christmas on 27th December 2008. The remaining stores were also closed by 6th January 2009. Approximately 30000 jobs were lost as the 99 year old chain went under, in its centenary year.

Now Woolworths has come in its new incarnation of a purely online store from its earlier version of a brick-and-mortar retail chain. After it entered administration and was closed down the Woolworths brand name was bought by Shop Direct Group. On 2nd February 2009, Shop Direct announced its intention to continue Woolworth as a purely online store.The online store uses the same URL as the earlier Woolworths’ groups retail website, Woolworths.co.uk.

The outcomes of the strategic planning could not have been more different for both the companies. Primark capitalized on the need of lower cost fashionable clothes during the current recession. Woolworths through its faulty strategic planning, or more accurately, through its lack of strategic planning became its prey.

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