Case-16-18 Southwest Airlines – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Cases 16 to 18 Case 16: Southwest Airlines INTRODUCTION This case highlights a pioneering airline company with humble roots, an enduring culture shaped by a maverick leader, and a record of success in an industry where most companies have failed to prosper in the decades since deregulation. Southwest Airlines’ history is a case study in itself, but this case analysis focuses on industry and competitive conditions that face all U.S. airlines. It does provide an opportunity to examine Southwest Airlines' distinctive strategic approach and the company’s remarkable performance record. Furthermore, it allows speculation about whether the firm’s long-term strategic competitiveness is threatened by inevitable change in the general, industry, and competitor environments within which Southwest Airlines operates. The foremost matter for consideration is the company’s 2011 acquisition of AirTran – not only the anticipated organizational impact that integration will have on the firm’s culture, operations, systems, and strategy, but the crucial step of entering international markets for the first time. The case opens with a discussion of the U.S. airline industry, including extensive industry metrics for major carriers. A detailed explanation of industry economics follows, along with remarks on recent industry performance. The case then turns its attention to an in-depth look at the background, operations, and performance of Southwest Airlines. The leadership of founder Herb Kelleher and the pervasive Southwest spirit are also presented before delving into firms that have attempted to emulate Southwest Airlines’ successful strategy – the most noteworthy amongst these being JetBlue Airways. Finally, the case wraps up by describing the company’s recent expansion initiatives and its acquisition of AirTran Airways. Fully armed with an understanding of the company and the industry and competitor environments, an attempt can be made to address the challenges confronting Southwest Airlines in the immediate and long-term future. A comprehensive analysis enables a discussion of the opportunities and challenges facing Southwest Airlines and an assessment of the firm’s readiness for evolving conditions. What are the key industry conditions which render profits elusive for airlines? Using the five forces model of competition, what does the structure of the industry reveal about competitive rivalry and profit potential? Discuss Southwest Airlines’ business-level strategy and its record of success. How is the company stacking up against other major airlines today? Are there any strategic shortcomings that need to be addressed? Identify and explore the opportunities and challenges presented by Southwest Airlines’ acquisition of AirTran. What are the merits and concerns of using the acquisition to launch the company’s expansion into international territories? Does Southwest Airlines have a sustainable competitive advantage? What strategic recommendations can be made to strengthen the durability of the company’s competitive advantage; or do conditions suggest that it is time for a shift in Southwest Airlines’ strategic direction to achieve long-term competitiveness against its rivals? ANALYSIS What are the key industry conditions which render profits elusive for airlines? Using the five forces model of competition, what does the structure of the industry reveal about competitive rivalry and profit potential? The domestic commercial airline industry is known for its volatility. It has experienced significant consolidation and turmoil since deregulation in 1978. The market is highly competitive and extremely vulnerable to fuel crises, recessions, and more recently, acts and fear of terrorism. Destructive fare battles, financial losses, and airline bankruptcies are commonplace amongst U.S. airlines. Salary inequities and deterioration are more recent indicators of the industry’s instability. The five forces model of competition supports the diagnosis of the U.S. air transportation industry as highly competitive, with structural obstacles to profit potential. The strength of each of the competitive forces is depicted in the diagram below, and further discussion follows. The airline industry’s extremely high cost structure is one of the most significant impediments to profitability for U.S. carriers. With fixed operating costs averaging approximately 80% of total costs, passenger airlines have perhaps the lowest net operating margins of any domestic industry. Supplier bargaining power is manifest in the price and availability of aircraft, fluctuating fuel prices, access to airport terminal resources, and labor-negotiated salaries. Product substitutes, such as alternative forms of travel and the option to not travel, can deem air transportation unnecessary. In fact, most of the public recalls or still considers that air travel is a luxury. For those who elect to fly, consumer bargaining power is enhanced by information availability, low switching costs, and limited opportunities for carriers to distinguish themselves from their competitors or to establish brand loyalty. When buyers view products as undifferentiated commodities, they tend to make purchasing decisions on the basis of price. Downward pressure on ticket prices increases rivalry and drives lower profits in the industry. In addition to price, competition amongst airlines is destination/market-oriented. Other variables that influence buyer decisions include safety, convenience, affiliation, and quality. Substantial barriers to entry exist in the airline industry, which include: economies of scale, capital requirements, availability of airport slots and operation certificates, numerous equally-balanced competitors, high fixed costs, high strategic stakes, and high exit barriers. Airline 'fortress hubs' prevent new carriers from access to what are considered legacy airline domains, greatly restricting opportunities for route expansion. One of the more interesting observations that can be made is that, despite significant entry barriers that should prevent new firms from entering the passenger airline industry, new companies are continually emerging. Southwest Airlines and JetBlue are prime examples of newer participants that established successful new business models in the highly competitive arena despite unattractive industry conditions. From 1994 to 2004, a total of 66 new airlines emerged. And even though 43 of them subsequently folded, one-third survived and constitutes a burgeoning second tier of competitors serving limited routes and offering lower fares. In some cases, new market entrants have revitalized the industry, forging new ways of competing, opening up forgotten travel routes, and satisfying unmet customer needs. Being smaller, more nimble, and more focused, new entrants like Southwest Airlines and JetBlue have earned a solid position against legacy airlines burdened with high cost structures. As a result, industry giants have been forced to make dramatic changes in their strategies to survive. Most recently, mega-mergers of major airlines have offered legacy carriers the only hope of prospering. Large domestic airlines can still wield great havoc in the industry by engaging in a price battle for ownership of target routes and markets. Their reactions to protect market share increase rivalry, tend to have a downward effect on prices, and diminish returns, weakening all airlines. In addition to these competitive forces, other industry conditions negatively influence the level of competitive rivalry amongst airlines. Defense of existing routes and geographic regions is intense because airlines have a high level of market dependence. The ability to assertively defend market positions depends on available resources and capabilities. In the past, poor financial health has limited the ability of major airlines to strike against infringing competitors. However, operating performance is improving for legacy carriers, lending to financial stability which will enable them to adopt more aggressively defensive behavior. There is no question that Southwest Airlines will face more aggressive competitive behavior as new market conditions emerge. Perhaps the biggest challenges will come from major U.S. airlines that have emerged from bankruptcy protection and mergers with streamlined operations, lower cost positions, and a strong desire to protect their share of the post-recession rebound. These large competitors can leverage their dominant market positions, brand recognition, and access to growing resources to launch significant (even if fairly predictable) competitive moves. On the other hand, newer carriers who can successfully approach Southwest Airlines’ low-cost advantage but seek to differentiate themselves with added-value services and style present a different competitive threat. Smaller competitors can use speed to surprise the market and quickly seize opportunities with unanticipated moves. Given the competitive nature of the industry, all of Southwest Airlines’ rivals are likely to be continuously on alert for opportunities to capture market share. Further industry change seems imminent. Strategies can be costly to imitate in a standard-cycle market, yet ala carte fees are just one new way that airlines have discovered to enhance their revenues and financial resources. Some low-cost competitors earn up to 25% of their revenues through ancillary fees. There is a general sense that major industry shifts are brewing beneath the surface. It is in preparation for these shifts and in light of evolving industry conditions that Southwest Airlines needs to thoroughly assess its current strategic approach. Discuss Southwest Airlines’ business-level strategy and its record of success. How is the company stacking up against other major airlines today? Are there any strategic shortcomings that need to be addressed? Southwest Airlines’ cost leadership strategy has led to consistent growth and performance for over forty years. From a small, short-haul regional upstart in 1971, Southwest Airlines is now one of the leading airlines in the United States. Focus on achieving cost advantages and offering low fares in under-served markets has been the foundation of the company’s success in the volatile airline industry. Perhaps most importantly, the company has accomplished its strong record by challenging accepted norms and setting higher competitive thresholds for other airlines to pursue. The company has established numerous new industry standards by deviating from standard practices. The case fully details the vital elements of Southwest Airlines’ strategy, which singularly focuses on the simple business of taking its passengers from point A to point B affordably, conveniently, and without hassle or flare. In addition to low costs and low fares, the components of the company’s domestic-only strategy that differ from those of major carriers include: short, point-to-point, high-frequency routes; standardized fleet; simple fare structure; no frills, amenities, seating assignments, or additional fees; slow, controlled growth; low debt; premium salaries; technologically innovative first-mover customer processes; and a rich, customer-focused, employee-empowered organizational culture. How the firm integrates the activities performed within its low-cost business level strategy has resulted in equipment management, operational efficiency, capacity utilization, turnaround, and customer satisfaction advantages. Cross-departmental cooperation and the company’s notable reputation as a desirable place to work minimizes employee turnover (therefore, costs associated with hiring and training) and also contributes to its unique position in the industry and ability to provide outstanding customer service for air travelers. Southwest Airlines’ superior integration of activities has shaped the company’s competitive advantage and above-average returns, explaining why imitators are seldom able to duplicate its success. The average age of the aircraft in Southwest Airlines’ fleet is 11 years – the lowest of all major carriers. The company’s average flight time is just under 2 hours, and average distant per flight is just less than 700 miles. The low-cost carrier owns 497 of the 737 planes in its fleet and leases the remaining 240 aircraft. Each plane averages 7 flights per day – which is twice the industry average – and flies approximately 13 hours per day – or 40% longer than other major carriers. Southwest Airlines’ cost per available seat mile (CSM) and employee cost per ASM are lower than legacy airlines’, but not lower than JetBlue’s. Due to longer average flight lengths, the industry’s new, smaller carriers can and are making inroads with lower costs. For instance, JetBlue’s average flight length is 1,085 miles (56% longer than Southwest Airlines’ 694 miles) and its operating cost per ASM is 20% lower. Regardless, its revenue per ASM is still 16% behind the veteran airline’s. And its on-time performance lags behind as well. In terms of scale, JetBlue has approximately 29% of Southwest Airlines’ revenues and 33% of its number of employees. And the upstart rival is in 77 destination cities, not far off from Southwest Airlines’ 97. (Refer to the operating data in the table below and to Table 2 in the case.) Operating Data Southwest JetBlue Difference Operating Cost per ASM (cents) 14.18 11.34 -20.0% Revenue per ASM (cents) 14.82 12.45 -16.0% Average flight length (miles) 694 1085 56.3% Revenue (in billions) 17.1 5.0 -70.8% Employees (in thousands) 46 15 -67.4% Destination Cities 97 75 -22.7% Because of the company’s nonconforming approach, industry performance measures do not necessarily make meaningful comparisons. Ultimately, comparative operating data is only relevant if overall revenue and profits are impacted. For instance, in Table 2 of the case, Southwest Airlines has the lowest load factor (an industry measure of capacity utilization) of the top seven airlines. But the company’s revenue growth rate consistently exceeds theirs (see Exhibit 1B), and its net debt is a distinct competitive advantage over its rivals (see Exhibit 10) – both measures which have a direct impact on the firm’s financial bottom line. In addition, Southwest Airlines has relatively poor performance in terms of per ASM (or per mile) measures, such as revenue per ASM (see Table 2) and average RPMs per passenger (see Exhibit 3). However, the company has the highest and growing passenger revenue per RMP (see Exhibit 4) and maintains an extraordinary advantage in terms of average employees per aircraft (see Exhibit 9) and passengers flown per employee. In other performance areas, where the company has made a conscious strategic decision to deviate from industry practices, such as salary levels (see total labor cost per AMS in Exhibit 8), its relatively higher rates are not necessarily a concern. In fact, Southwest Airlines’ satisfied and motivated workforce is a distinct advantage. Moreover, the company is making tremendous gains in some previously disadvantaged performance areas, such as load factors (see Exhibit 5), where it is narrowing the perceived advantage of the majors. However, troubles do exist for the low-cost carrier. Since 2002, Southwest Airlines has seen its unit cost (CASM, or cents per ASM) advantage steadily erode. In 2010, Delta Airlines reported a lower rate. And other major U.S. airlines were gaining ground (see Exhibit 6). In terms of unit costs (without labor), Southwest Airlines’ advantage is also diminishing (see Exhibit 7). The company lost its lead in terms of operating margin in 2007; and while its margin remained strong, the margins of other major U.S. airlines are converging at Southwest Airlines’ level. Perhaps more telling, or disturbing, is the fact that JetBlue’s operating cost per ASM is 20% lower than Southwest Airlines’ (see table above). And Alaska Airlines is within 3% (see Table 2). Additionally, the company’s on-time departure and arrival rankings are less than spectacular. Southwest Airlines is being bettered, not only by small regional carriers (like Alaska Airlines), but handily by major carriers (Delta Airlines and U.S. Airways). This reveals that the company’s operational efficiencies may be declining, despite the advantages detailed above. Finally, one of the more immediate challenges to Southwest Airlines’ strategy of steady, controlled domestic growth is its 2011 acquisition of AirTran. Identify and explore the opportunities and challenges presented by Southwest Airlines’ acquisition of AirTran. What are the merits and concerns of using the acquisition to launch the company’s expansion into international territories? Of the new start-ups to enter the airline market emulating Southwest Airlines’ cost leadership strategy, AirTran has been one of the most successful. Southwest Airlines’ horizontal acquisition of AirTran (1) increases the company’s market power (2) increases its depth in regional markets (3) facilitates geographic diversification by adding international destinations to the company’s routes for the first time in its history and (4) provides an opportunity for learning and development of new capabilities to enhance customer satisfaction and improve performance. AirTran has a lower cost structure than Southwest Airlines, so the company would be wise to closely examine best practices that can be adopted from the acquired firm. (This includes the AirTran’s seating classification system and operating systems in foreign markets.) $400 million in synergies are anticipated during the first year. It is in the company’s favor that it has nurtured a flexible, adaptable, yet focused workforce. Southwest Airlines has limited experience integrating an acquired firm with ongoing operations, which is essential for achieving acquisition success. Integration difficulties are the chief impediment to realizing expected synergies. The challenge for Southwest Airlines will be to integrate the activities, systems, workforces, and cultures of the two organizations without negatively impacting the company’s inherent effectiveness and distinct cultural advantages. And during this process, it will be sensible to cultivate long-term gains, because short-term gains are often elusive. The domestic airline market is maturing, increasingly competitive, and characterized by revenue and profit constraints. Southwest Airlines is now thoughtfully considering growth opportunities outside of the U.S., and the AirTran deal is likely to play a critical role in this expansion initiative. The acquisition of AirTran’s international routes is an ideal opportunity to reshape the company’s competitive scope to lessen the impact of intense rivalry and reduce its dependence on the home market. It enables Southwest Airlines to overcome the diverse entry barriers of international markets, navigate legal and regulatory requirements for each nation, gain experience, and increase the speed at which its international expansion can occur – while simultaneously reducing the risks and costs of entering new markets outside of the U.S. The use of an acquisition to introduce Southwest Airlines to international markets is preferable than the use of a cooperative strategy because it enables the company to maintain control of its strategy and image. The concerns about using the AirTran acquisition as its entry into foreign markets include the fact that it may compromise Southwest Airlines’ strategy and business model. For instance, AirTran may be using primary airports rather than the less-congested secondary destinations preferred by Southwest Airlines. The company has already decided to sell the 88 Boeing 717s owned by AirTran, but perhaps different aircraft are preferable for overseas flights. Using AirTran’s existing route network puts the company in foreign markets that it has not assessed with the criteria the company typically uses to enter new markets. The competitive conditions, existing alliances, cultural fit, political and economic risks all factor into the decision to enter each individual international destination. The company must consider if it is prepared for the uncertainty and increased management complexity of entering these markets all at once. STRATEGY Does Southwest Airlines have a sustainable competitive advantage? What strategic recommendations can be made to strengthen the durability of the company’s competitive advantage; or do conditions suggest that it is time for a shift in Southwest Airlines’ strategic direction to achieve long-term competitiveness against its rivals? It is essential for the firm to continually evolve, but to do so without damaging the advantageous qualities of its strategy. To respond to developing industry and competitive conditions in the short term, Southwest Airlines has recently made some adjustments to its service features. The company has expanded its simplified fare structure to include three pricing categories and has increased its sales emphasis on corporate travelers. The boarding process has been modified and frequent flyer status enhanced to increase business and customer loyalty. The company is also using co-branding, partnerships, and promotion of its “2 bags free” policy to differentiate the airline. These changes are responsive to competitive conditions, yet consistent with the company’s business strategy, so as to not diminish its effectiveness. For the longer-term, it is difficult to influence the substitutable nature of air travel. However, the lower the fares and the greater the convenience, air travel can be so attractive to consumers that the appeal of substitutes is diminished. In addition, the sustainability of the company's competitive advantages can persist so long as they continue to provide value, remain uncommon, and are costly and disruptive to imitate. Southwest Airlines’ younger, standardized fleet, corporate culture, and high-performing workforce cannot be emulated (easily or perhaps at all), but other features of its strategy (such as point-to-point service, the use of secondary airports, a satisfied workforce, and operational efficiency) are more attainable. And the ability of rivals to enhance customer conveniences, improve traveler experiences, and make technological advancements to improve customer processes at lower cost points is a real threat to Southwest’s no-frill, minimum fare offering. Based on the analysis in the above sections, there is sufficient evidence to suggest that Southwest Airlines’ cost leadership business strategy is still a strong fit with existing industry conditions. It is important, however, that the company identifies and addresses the operational problems that are negatively impacting its on-time performance and driving up costs. On-time performance is directly related to customer satisfaction. If customers become unhappy with Southwest Airlines, the company is vulnerable to competitor tactics. Also, costs are directly related to the company’s ability to offer lower fares than its rivals. When Southwest Airlines can keep its fares at unmatched levels, other airlines are less likely to engage in price adjustments as a form of tactical competitive behavior. The company should continue to seek radical new cost-saving ideas. For instance, there may be a unique opportunity to substantially impact costs by leasing rather than owning aircraft. Or perhaps vertical integration or alignment (partnership) with a like-minded aircraft leasing company would be a viable option. While competitors can also lease, the advantages of Southwest Airlines’ single aircraft fleet would multiply backward through the supply chain. Such gains would be unachievable by other airlines. The looming threats of (1) a burgeoning second-tier of regional low-fare competitors and (2) a revitalized group of legacy carriers in command of major markets deem it necessary for Southwest Airlines to solidify and maximize the performance of its current strategy. Looking at these two market forces as constituting different strategic groups, the company can devise defensive strategies to compete along vital strategic dimensions specific to each set of competitors. JetBlue’s destinations, resources, and decisions should be monitored (along with those of other regional carriers) to anticipate the rivals' competitive actions and formulate appropriate responses. The competitive behavior of larger merged airlines at major destinations may require different competitive responses. It is important to structure strategic decisions distinctly based on competitive activity in each strategic group. For instance, if Southwest Airlines wants to consider increasing services (and shifting toward an integrated low cost-differentiation business-level strategy), its choice of offerings may differ for each strategic group. This analysis does not recommend diverging from the cost leadership strategy at this time, but some analyses may build an argument for it. The loss of strategic focus and increased costs of incorporating differentiated features would damage Southwest Airlines’ competitive edge. The company’s low cost position and profitability (fueled by its operating strengths) are still the cornerstones of the company's competitiveness and success. Others may argue that the company’s dependence on competitor inability to match its cost structure is already weakening Southwest Airlines’ competitive advantage and that the need to differentiate the company’s services is now. Especially with JetBlue's value proposition, it is increasingly important to seek new customer-oriented and technology-driven procedural improvements and to find unique ways to build customer loyalty. With competitor strengths growing, there may be only a temporary window of opportunity for Southwest Airlines to capture the consumer’s attention, strengthen customer relationships, and use the company's "no fees" stance to maximize its bond with customers. For those who suggest that it is time to differentiate, it is important that the implementation of such changes take into account the different market conditions for the two strategic groups described above. Finally, the keys to strengthening the sustainability of the company’s competitive advantages are reinforcing the high cost of imitation and fostering internal innovation. This entails protecting the cultural advantages embedded in Southwest Airlines’ workforce and securing the company’s first mover position in the domestic airline industry. The keys to continued growth are further penetrating domestic markets or pursuing expansion opportunities outside of the U.S. Organizational Culture. Protecting the company’s famed culture may not be as easy as it seems. The leadership vacuum left from Herb Kelleher and the impending integration with AirTran both present a risk of cultural deterioration. Therefore, Southwest Airlines must attempt to shape the organizational changes that are likely to unfold with these two concurrent forces. Practices that can be maintained include hiring and training linked with strategic goals (to promote enthusiasm, personality, humor, fun, and initiative throughout the organization), demonstrating leadership loyalty and commitment to employees (through communication, consistent policies with the general workforce, and advanced training programs), focusing on building esprit de corps (through encouragement, support, job security, salary policies, and profit sharing), and instilling shared goals (which results in respect and cooperation across departments). There is a reason that Southwest Airlines has the lowest turnover rate in the industry, and the company is capable of indoctrinating the AirTran workforce while integrating it with the Southwest Airlines team. The orientation and transition period for AirTran employees will be extremely crucial for promoting cultural consistencies. Internal Innovation. To combat intense competition and create value in a high-volume standard-cycle market, internal innovation capabilities are essential. And for Southwest Airlines, this is no exception. The company has a record of inventing forward-thinking customer processes that have kept its competitors on their toes. And the ability to solve arising service problems and create superior traveler experiences ahead of competitors remains crucial. It is desirable to continue to distinguish Southwest Airlines in terms of service, on-time performance, ease of check-in (travel), and luggage (ancillary) policies in order to build customer loyalty and to attract new customers in the increasingly-crowded market. But there may be new factors of convenience or initiatives that can be discovered to enhance its quality of services to keep customers wanting to fly with Southwest Airlines. For success with a low-cost business-level strategy in a standard-cycle market, it is important to understand changes in customer needs and values and to nurture the core competencies necessary to satisfy evolving preferences and market conditions. Variables that influence buyer decisions include points of destination, safety, price, convenience, and affiliation; and variables that define quality include timeliness, courtesy, consistency, convenience, completeness, and accuracy. In addition, it is important to carefully control operations for consistency – or in the case of Southwest Airlines, to consistently deliver an element of surprise or delight to shape positive customer experiences. Domestic Growth. The data in the case does not disclose if further regional market penetration is an option for Southwest Airlines. As new, small carriers continue to enter regional markets, there must be some room for growth at this level. It is also uncertain if the company is prepared to increase its rate of growth. Perhaps, once Southwest Airlines successfully integrates AirTran operations into its own and has experience with merging an acquisition of substantial size, it could be an option to purchase successful regionals airlines to build a powerful strategic position in this secondary market space throughout the country. International Expansion. Finally, the analysis above indicates that international expansion seems to be inevitable for Southwest Airlines, as growth in the domestic marketplace slows. A strong domestic strategy is an ideal foundation for competitive success in international markets. Clearly, the company’s best strategy would be to export its core competencies and strong capabilities as a low-cost leader by targeting second-tier, under-served, international destinations and offering very low fares. Of course, the AirTran routes can be leveraged where they are a good fit with Southwest Airlines’ strategy. Southwest Airlines Op'g Data JetBlue Comp Case 17: Starbucks Corporation: The New S-Curve INTRODUCTION Starbucks Corporation is a model of extraordinary business success. Known for sourcing, roasting, and serving high quality coffee and for elevating and romanticizing the consumer’s experience, Starbucks’ rapid growth seemed unstoppable – at least until its store expansion strategy became unsustainable and imploded in financial crisis. This case describes the diversified, multichannel, and multibrand business model that the company implemented at the end of fiscal year 2010, after the crisis and a “painful, three-year transformation”. Following a brief introduction, the case immediately delves into new products and categories that are defining a new era at Starbucks. It then steers back to the core coffee business and renewed development, improvement, and global expansion initiatives. Channel development is featured; then the case concludes with a discussion of leadership, culture, employee engagement, and community service. The purpose of the analysis is to evaluate the company’s diverse and growing business portfolio and the strength of Starbucks’ new strategy. Follow the steps below to conduct the analysis and to identify the advantages and disadvantages of the firm’s strategic direction. • Define and discuss the company’s corporate-level strategy. What are the benefits and/or shortcomings of Starbucks’ diversified portfolio? • Compare and evaluate the company’s product development strategies. What are the advantages and disadvantages of each? • Review the scope and performance of Starbucks’ international businesses. What type of international strategy do you recommend for the company? • Discuss Starbucks’ need for a new strategy in the late 2000s. Based on the analysis, what are the strengths and weaknesses of Starbuck’s current strategy? ANALYSIS • Define and discuss the company’s corporate-level strategy. What are the benefits and/or shortcomings of Starbucks’ diversified portfolio? A corporate-level strategy involves the management of a group of different businesses competing in different product markets. The intention of corporate-level strategies is diverse positioning to increase firm value. After 2010, Starbucks’ new blueprint for sustainable, profitable growth was based on building a more diversified, multichannel, multiproduct organization. Consequently, many of Starbucks’ post-transformation moves have occurred outside of the iconic Starbucks coffee shop. The table on the next page lists all of Starbucks’ product lines and cross references them to the company’s sales channels. Product/Brand Starbucks Coffee Cafes Branded Stores Owned by Starbucks Grocery and Other Channels (CPG) Juices – Evolution Fresh Ready-to-drink in 2,200 Starbucks stores Fresh in 4 Evolution Fresh stores Ready-to-drink in 8,000 supermarket and convenience stores Baked Goods – Bay Bread Warm display in 3,500 Starbucks stores Fresh in 19 La Boulange Café & Bakeries Fruit and Nut Bars – Evolution Harvest Packaged food item in Starbucks stores Whole Foods Market Yogurt Parfaits – Danone Exclusive in Starbucks stores (2014) Grocery stores (2015) Breakfast Sandwiches Served hot in Starbucks stores Bagged Teas – Tazo Bagged and single-serve in Starbucks stores Bagged and ready-to-drink in grocery/related stores Exclusive organic bagged flavors at Whole Foods Loose-Leaf Teas – Teavana Loose-leaf, packaged, and shaken iced in Starbucks stores (2014) Oprah Chai Tea Loose-leaf, packaged, and Oprah Chai Tea in 300 Teavana shopping mall stores 3 flagship stand-alone Teavana shops Packaged loose-leaf Coffees – Seattle’s Best Coffee Defunct Borders bookstores Ground and whole bean packages in 50,000 partnership distribution points Packaged varieties in grocery and retail stores Carbonated Beverages – Fizzio Handcrafted caffeine-free cold drink in select U.S. and China markets 1/3 of Starbucks stores (2014) Energy Drinks – Starbucks Refreshers Iced fruity green coffee extract drink in Starbucks stores Ready-to-make powdered Canned carbonated flavors Alcoholic Beverages – Starbucks Evenings Wine and beer in 23 select stores Wine and beer in 1 non-branded Seattle location cont. cont. Coffee Starbucks Coffee Cafes Branded Stores Grocery and Other Channels (CPG) Light Roast, Seasonal, and Reserve Blends – Starbucks Lighter roasts, seasonals, and macchiatos in Starbucks stores Exotic and limited blends in select stores Ready-to-drink frappuccinos and iced coffees Ground and whole bean packaged varieties in grocery and retail stores Instant – Starbucks’ VIA Ready Brew Packaged product sold in Starbucks stores Ready brew instant Other retail Single-Cup Brewing – Clover Reserve blends in 500 coffeehouse locations (1,000 locations by 2014) Single-Serve Pod Drinks – Verisimo Packaged product sold in Starbucks stores Other retail Starbucks’ backward integration into the food product supply chain can enhance the company’s market power over rivals. This market power can be gained as the firm develops the ability to save on its operations, avoid sourcing and marketing costs, improve product quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying capabilities in the marketplace. Vertically integrated firms have access to complementary information and knowledge that can improve product quality and foster new technologies. Market power is also created through strong ties across productive assets for which no market prices exist. The company entered the consumer packaged goods (CPG) business with the sale of packaged Starbucks and Seattle’s Best Coffee whole beans and ground coffee at supermarkets. Now, its CPG business includes premium Tazo teas, Starbucks and Tazo branded single-serve products, ready-to-drink beverages (such as Starbucks Refreshers and Evolution Fresh juices), Evolution Harvest snack bars, and other branded products sold worldwide through grocery stores, warehouse clubs, specialty retailers, convenience stores, and food service accounts. In 2012, this channel development business segment experienced an impressive 50% net revenue increase (due in part to taking all distribution activities back from Kraft) before landing at a more sustainable pace of 10% growth. In 2013, Starbucks generated 9% of total company revenue, or $1.4 billion, in this channel development segment. The Starbucks name is nearly synonymous with coffee. The brand is certainly the dominant premium coffee in the domestic market. And the company’s multifaceted strategy blocks competitors on all fronts. Diversification can provide flexibility to shift Starbucks’ investments to markets where the greatest returns are possible, rather than the firm staying dependent on only one or a few markets. For instance, the company’s new Evolution brands tap into the thriving health and wellness industry. Or in the case of its Verisimo single-serve brewing line, Starbucks is targeting the home coffee drinker whose daily routine does not include coffee shop purchases. In addition, the company stands to benefit from economies of scaled production, driven by volumes that supply multiple distribution channels. However, Starbucks’ vertical integration strategy does have potential limitations. If outside suppliers can manufacture products at lower costs, internal (cross-divisional) sourcing transactions may be expensive and reduce profitability relative to competitors. Bureaucratic costs associated with a vertical integration strategy can also cut into the firm’s bottom line. In addition, substantial investments in specific technologies may negatively impact the firm’s flexibility, especially when technology changes quickly. Finally, shifts in demand can lead to coordination and capacity balance issues. There are also risks associated with firms diversifying in search of economies of scope and operational relatedness. Synergy created by business units working together can be elusive when diversified investments become too inflexible. As a firm increases its relatedness among business units, it also increases its risk of corporate failure because synergy produces joint interdependence among businesses that constrains the firm’s flexibility and responsiveness. Furthermore, development and monitoring costs can become substantial as the firm expands into new businesses and markets. Diversified firms must select a business-level strategy for each of the businesses in which it decides to compete. The business strategy for each of Starbucks’ product lines is clearly one of differentiation. For each of its premium brands, Starbucks offers distinctive products for customers who value differentiated features more than they value low cost. Product differentiation based on ingredients, quality, uniqueness, flavor, and handcrafting is thoughtfully presented in store settings and coupled with service programs to enhance consumers’ experiences. Café ambiance is a key distinguishing element for the coffee brand, and the company has invested heavily in its Digital Ventures business to attract and satisfy customers. Differentiation requires a thorough understanding of what target customers value, the relative importance they attach to the satisfaction of different needs, and for what they are willing to pay a premium. Going a step further, Starbucks is exploiting this awareness and the power of its brands to drive the sales of consumer packaged goods in alternative retail channels. Despite enormous investments and an aggressive, multifaceted strategy to turn the coffee giant into a diverse CPG company, it might seem surprising that Starbucks should still be classified as a dominant-business with low levels of diversification. (Firms with a dominant-business diversification strategy generate 70-95% of their total revenue within a single business area.) In both 2012 and 2013, 88.3% of Starbucks’ revenues were earned in company-owned and licensed stores, while 11.7% of sales were earned in consumer packaged goods, food service, and other categories. (Refer to Table 2 in the case.) Single sales of premium coffee and coffee drinks in U.S. bricks-and-mortar retail shops continue to drive the majority of the company’s revenues. As a dominant-business with low levels of diversification, Starbucks must act as such, either by (1) further diversifying to achieve a related diversification strategy with greater synergies, linkages between product lines and sales channels, and shared operational activities, resources, key competencies, and knowledge, or (2) remaining focused on dominating the coffee segment, resolutely pursuing its goal to be the third-most-common place to frequent (after work and home) in the morning and during the lunch and evening hours. The company will need to generate more than 30% of its revenue beyond the Starbucks coffee shop to build a highly developed corporate capability for transferring one or more core competencies across businesses. The corporate-level strategy’s value is ultimately determined by the degree to which the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership. On the other hand, does diversification impede the company’s ability to maintain a premium aura for certain products or in certain distribution points? In other words, are all of its diversified brands (such as the juices, snack bars, carbonated beverages, or ready-to-drink Tazo teas) distinctive enough to establish value and command premium prices? Does the company’s two-tier structure for coffee and tea products distract from or damage Starbucks’ premium branding strategy? Furthermore, do the company’s lean operational practices and cost-cutting store management processes reduce its ability to differentiate effectively, leaving the firm “caught in the middle”? An affirmative response to any of these questions is an argument for managing increased diversification efforts with caution and for reinforcing the company’s focus on the components of a premium brand differentiation strategy. • Compare and evaluate the company’s product development strategies. What are the advantages and disadvantages of each? Starbucks has engaged in a product diversification strategy to create value for stakeholders and competitive advantages for the firm. The company has achieved new product development in multiple ways – through acquisitions, internal innovation, and cooperative arrangements. The table below identifies the development strategy associated with each of Starbucks’ new product lines. Product/Brand Acquisitions Partners Internal Innovation Juices Evolution Fresh Baked Goods Bay Bread Baked Menu Items Breakfast Sandwiches Fruit and Nut Bars Whole Foods Evolution Harvest Yogurt Parfaits Danone Breakfast Sandwiches Breakfast Menu Items Bagged Teas Tazo PepsiCo Whole Foods Exclusive Blends Loose-Leaf Teas Teavana Oprah Chai Tea Carbonated Beverages Fizzio Refreshers Energy Drinks PepsiCo Starbucks Refreshers Coffees Seattle’s Best Coffee PepsiCo Light Roast, Seasonal, and Reserve Blends Instant Coffees Starbucks VIA Ready Brew Single-Cup Brewing Clover Single-Serve Pod Drinks Keurig Verisimo Through acquisitions, partnership agreements, and internal innovation, Starbucks is striving to gain market power, improve performance, and fuel growth. The company is simultaneously: » upgrading café product offerings to drive same store sales growth (SSSG), » vertically integrating to reduce costs and boost profits, and » extending its reach into new sales channels to leverage brand and product value. In addition to complementary products that can be introduced in Starbucks stores, the company has acquired or launched new product lines which can expand the firm’s capabilities, access growing markets, improve quality, and perform outside of the Starbucks coffee shop model. Achieving greater market power is a primary reason for making acquisitions. Market power derives from the ability to sell goods above competitive pricing levels or from performing primary or support activities at a lower cost than competitors. Market power depends upon the size of the firm, the quality of the resources it uses to compete, and the company’s share of the market(s) in which it competes. Therefore, most acquisitions that are designed to achieve greater market power entail buying a competitor, supplier, distributor, or business in a highly related industry so that a core competence can be used to gain competitive advantage in the acquiring firm’s primary market. Starbucks’ acquisition of Seattle’s Best Coffee was a horizontal acquisition because the company competed in the same industry. Horizontal acquisitions should increase a firm’s market power by enabling cost-based and revenue-based synergies. In this case, after sidelining the former competitor for several years, Starbucks used the brand to pave the way for aggressive expansion into CPGs. Meanwhile, the company eliminated a direct obstacle to achieving its ubiquitous café strategy. Several of Starbucks’ acquisitions stemmed from targeted menu and product sourcing decisions. By vertically purchasing firms that could be scaled to supply its coffee shops, Starbucks forged opportunities to create value through backward value chain integration. Strategic alignment and the control of product development, costs, access, quality, and exclusivity are the benefits of the company’s vertical acquisition strategy. Finally, Starbucks has also made related acquisitions – acquiring firms in highly related industries. Purchasing Teavana was a major move into the estimated $90 billion tea industry, an intended game changer in a category that Starbucks believes is “ripe for reinvention and rapid growth”. This provides the company with an alternative format to achieve its ubiquitous café strategy as the firm faces domestic market saturation. In addition, Starbucks purchased the Clover single-cup brewing system. The value of this related acquisition is created by synergies from integrating both companies’ resources and capabilities. The table at the top of the next page summarizes Starbucks’ recent acquisitions. Product/Brand Acquisitions Acq. Price Type Stand-alone CPG Juices Evolution Fresh $30 million Vertical 4 X Baked Goods Bay Bread $100 million Vertical 19 Bagged Teas Tazo Vertical X Loose-Leaf Teas Teavana $620 million Related 300 Mall* X Coffees Seattle’s Best Horizontal X Single-Cup Brewing Clover Related * Plus 3 new flagship stand-along neighborhood shops. Acquisitions can reduce the cost of new product development, increase the speed of delivering new products to the market, and provide access to capabilities that the firm is lacking. Introducing internally developed products into the marketplace can require a significant investment in resources. An estimated 88% of innovations fail to achieve adequate returns; and approximately 60% of innovations are imitated within 4 years of obtaining patents. Consequently, internal product development can be seen as a high-risk activity. It can also be a slow process. An acquisition strategy can not only be a more predictably profitable source of new products, but it can be a faster method of introducing new products into the market. In addition, research shows that firms can broaden their knowledge base and reduce inertia through acquisitions. However, using acquisitions to reduce the risks of internal product development requires some caution. Using an acquisition strategy, the firm needs to protect its own innovation capabilities as well as strategically plan the integration of acquired products and resources into current operations. A competitive advantage results from an acquisition strategy only when private synergy is created. This happens when acquired assets yield capabilities and core competencies that could not have been developed by combining and integrating either firm’s assets with any other company. Thus, the acquiring and acquired firms’ assets need to be complementary in unique ways. Although difficult to create, the attractiveness of private synergy is that, because of its uniqueness, it is difficult for competitors to understand and imitate. Thus, it becomes the source of novel competitive advantages. Starbucks’ strategic alliances with Danone, PepsiCo, and Whole Foods are vertical complementary relationships where the firms share resources and capabilities from different stages of the value chain. However, its dissolved partnerships with Kraft (distribution agreement) and Keurig Green Mountain (diversifying strategic alliance) demonstrate the challenges of achieving success with a cooperative strategy. Starbucks prematurely terminated its contract with Kraft because the terms of the agreement limited the company’s ability to pursue other promising market opportunities. And unfortunately, it appears that Starbucks engaged in opportunistic behavior related to the Keurig relationship. At the time of Keurig’s patent expiration, Starbucks used its knowledge of the former partner’s K-cup technology to launch its own competitive Verisimo system. Beyond tangible product development, Starbucks has heavily invested in digital innovation as a new source of both growth and operational excellence. In addition to pioneering digital capabilities through its Digital Ventures division, the company has partnered with Internet giant, Google, and mobile payments start-up, Square, for access to technologies that are linked to enhancing customer experiences, service, convenience, and loyalty. These initiatives enrich the company’s marketing activities in the value chain; and together with its use of social media tools, Starbucks is building a competitive advantage in the firm’s management of the reach, richness, and affiliation of its customer relationships. Consequently, the company clearly sees its Digital Ventures as a major driver of new growth, customer loyalty, and shareholder value. Starbucks is the retail industry’s “unquestioned” leader in mobile payment and mobile loyalty; and interestingly, the company is now uniquely positioned to develop and monetize its digital leadership into new platforms, revenue streams, and growth. The advantages and disadvantages of acquisition, cooperative, and internal innovation strategies are summarized in the following table. New Product Development Strategy Advantages Disadvantages Acquisitions - Access to new products – especially to diversify - Increased speed to market - Lower risks - Access to new capabilities - Opportunities for private synergies - Loss of internal innovation capabilities - Integration difficulties - Management challenges - Difficulty achieving synergies - Extensive debt (if used to fund acquisitions) - Loss of focus – potential for overdiversification - Potential to pay premium for acquisitions Partnerships - Opportunities for collaborative advantages and social capital - Access to complementary resources - Shared risks and resources - Increased new product development speed - Learning new knowledge and business techniques - Contract oversights - Misrepresentation of skills - Coordination difficulties - Monitoring costs - Misuse of resources - Opportunistic behavior - Unequal commitment Internal Innovation - Development of strategic capabilities to outperform competitors - High R&D costs - Low success rates - High risks - Competitor imitation • Review the scope and performance of Starbucks’ international businesses. What type of international strategy do you recommend for the company? As of mid-2014, Starbucks operated 20,000 stores in 64 countries. With penetration and dominance in the domestic marketplace, continued expansion into international markets is critical to achieving the company’s ultimate goal of “global domination”. As the next table reveals, Starbucks’ largest share of business is still conducted in the Americas. Its other international divisions represent only a very small percentage of corporate revenues. Global Division Percentage of Revenues Notes Americas 74% Limited growth opportunities in domestic market Interests in nearby South American coffee-growing regions make it a logical target market Cash generation to fund expansion Europe, Middle East, Africa (EMEA) 8% Struggling with profitability Flat SSSG China/Asia-Pacific (CAP) 6% Fastest growing business segment Highest profit margin Despite its prolific core retail coffee shop presence at home, Starbucks still accounts for only a “small share of the total global coffee occasions”. “Significantly under-stored” and “ripe for expansion in several markets”, the company is meeting disparate conditions in different regions throughout the world in its efforts to expand storefronts internationally. In the Americas, particularly in North America, growth rates are stunted due to market saturation. Future growth in the domestic market will depend heavily upon increasing store traffic and same store sales receipts. With online traffic cutting into store volume, Starbucks is also relying on digital investments to offset this trend. Elusive profits and same store sales growth in the company’s EMEA division have led to changes in ownership structure practices. Moving away from company-operated stores in favor of licensed and franchised stores, Starbucks has begun to see a slight rise in these performance metrics. However, the brand value in these markets is in question. Its commoditized shop model might not be going over well in EMEA countries due to ineffective differentiation; but surely the lack of prosperity in some regions interferes with the success of its premium brand and pricing model. Alternatively, the CAP division is producing a 27% growth rate, and the company is discovering the potential for large demand to materialize in these emerging markets. The brand is resonating with consumers. The potential market size, economies of scale, and learning opportunities are enormous. And it is likely that Starbucks’ cross-border strategic alliance with Tata Global Beverages Ltd. has played a key role in the success in this division. The company can apply its experience with this joint venture to overcome entry difficulties in other nations where culture, norms, trade policies, local knowledge, and competitive factors differ from Starbucks’ home market. In order to be responsive to the needs and conditions in each of these global regions, the arguments for adopting a multidomestic international strategy are strong. This entails the use of decentralized decision making to allow each business unit the opportunity to tailor its strategy to the needs of local markets. Taking into account variant consumer desires, industry conditions, political and legal influences, and social norms, the ability to maximize competitiveness is the primary concern of this approach. As Starbucks’ positions in these markets mature, knowledge sharing across markets (capturing excellent ideas that can be beneficial across divisions) will enhance the effectiveness of the strategy. And the company should look for ways to expand global economies. [Note: Starbucks’ move into the tea category can stimulate an interesting discussion of opportunities in the EMEA and CAP markets, where tea drinking habits far exceed the popularity of coffee.] STRATEGY • Discuss Starbucks’ need for a new strategy in the late 2000s. Based on the analysis, what are the strengths and weaknesses of Starbuck’s current strategy? Prior to 2007, Starbucks’ growth strategy was aimed at global domination by attempting to commoditize the premium coffee shop – or combining ubiquity with high-end product offerings. The company’s dramatic, pre-transformation growth implosion revealed the plan’s deficiencies. By 2013, the company was still aiming to be “the leading retailer and brand of coffee” in its target markets, but this time through a “disciplined” and selective expansion of stores in new and existing markets, as well as by increased sales in existing stores. This new approach seems to have stabilized the company’s foundation for growth and energetically established multiple avenues to create value. Starbucks’ strategy has reshaped the firm’s competitive scope, lessening the company’s product and/or market dependencies. It has created opportunities for economies of scope through shared resources and expanded sales channels. The company’s vertical and related acquisitions have been particularly critical to achieving scale and operational efficiencies, allowing shared activities, and expanding the pool of core competencies. The current strategy employs innovation centered on the core business, which is critical for a differentiation strategy requiring continual upgrades valued by consumers. Perhaps the intangible resources developing within the corporation – linkages among product lines, knowledge, experience, expertise, and private synergy – are the most important strategic benefit. They are difficult for competitors to understand and imitate, providing a powerful competitive advantage over rivals. The company’s strategy produces a constantly changing portfolio of products that complement each other and satisfy or enrich the customer’s experience. And this enables price points that substantially exceed costs, allowing the firm to outperform rivals and earn above-average returns. Because Starbucks seeks to be different from its competitors on as many dimensions as possible, the company is buffered from rivals’ actions. Through innovation, perceived prestige and status, technological leadership, and menu expertise, Starbucks has created real or perceived value as a strong basis for differentiating its offerings and brand. However, some concerns can be raised about the potential to overdiversify or become too large. Increased levels of diversification can have a negative effect on Starbucks’ long-term performance. (Refer to Figure 6.3 in the text.) Greater managerial complexity and information processing can lead to over-reliance on financial rather than strategic controls to evaluate business unit performance. This causes focus on short-term outcomes at the expense of long-term investments and the achievement of strategic objectives. While economies of scale and enhanced market power are desirable, the complexities generated as the size of the firm grows yields bureaucratic controls intended to manage expanded operations. Formalized supervisory and behavioral rules and policies designed to ensure consistency of decisions and actions across a firm’s units (for instance, Starbucks’ operational excellence programs and lean store practices) can potentially result in rigid and standardized managerial behavior. This diminishes flexibility and responsiveness and may reduce internal innovation – all needed to develop product offerings that to appeal to changing preferences and to enhance customer experiences. Even though Starbucks’ strategy is reinforced with organizational and leadership systems support, the company must cautiously manage the diversity of products, brands, and channels to avoid damaging the core coffee business and elite Starbucks’ brand. In addition, there is an inconsistency between the regional design initiatives and the company’s strategy of commoditized ubiquity. Massive customization is not scalable and dramatically increases costs, decentralizes decisions, and reduces control of processes and management of the brand image. Ultimately, the success of the strategy is measured by its effect on the company’s value. Financial figures are limited in the case, but revenues, shares, and same store sales growth metrics are positive. And the strategy does appear capable of establishing sustainable and profitable growth. However, even though Starbucks is employing a more disciplined approach, it is still aimed at commoditizing premium product offerings and growth to the point of global market dominance. Fundamental economic principles are at odds with this vision. The laws of supply and demand illustrate a negative relationship between price and quantity demanded. As prices increase, demand decreases. Starbucks is a premium brand; but even a cool brand is not shielded from this principle. Premium, high-priced products are incompatible with ubiquity. The proposition is only realistic as prosperity increases. One might ask, was it really the strategy that failed in 2007, or was it the recessionary conditions that soured consumers on products that could be considered a luxury. And now, how can a brand achieve ubiquity with a premium product dependent upon economic conditions throughout the world? Starbucks Case 18: Super Selectos: Winning the War Against Multinational Retail Chains INTRODUCTION This case thoroughly examines how Super Selectos, a local food retail chain from El Salvador, became successful in competing against Walmart, the largest food retailer in the world. After an overview of Central America region and the retail industry, the strategies of global retailers are described. Further, the case describes the food retailers in Central America and the Calleja Group. The case then delves into the competitive environment by reviewing the history of Walmart and how it entered Central America. The strategies used by Super Selectos are examined throughout the case in addition to forming SUCAP, Supermercados de Central America y Panamá, a strategic alliance established by owners/founders/CEOs of the leading domestic supermarket chains in Central America. The objective of this case study is to develop an understanding of Super Selectos’ competitive landscape in order to address compelling strategic issues. By conducting a competitor analysis that focuses on significant environmental factors, competitive data, industry leaders, and business strategies, strong recommendations can be proposed to guide Super Selectos as it continuously competes with the world’s number one retailer, Walmart. This case is ideal for demonstrating the importance of the external environment, competitive analysis, and SWOT analysis. The following points are to guide a review and discussion of these important concepts. • Describe the general environment that Super Selectos faces. What are the segments in the general environment that relate to Super Selectos’ situation? • Conduct a competitor analysis and assess the levels of market commonality and resource similarity that Super Selectos has with Walmart. How will they influence competitive behavior and the intensity of rivalry? • Considering Super Selectos’ external and internal environmental conditions, does a SWOT analysis reveal any insights to enhance the company’s efforts to compete or improve performance? • Examine Super Selectos’ strategies. How can the company remain as a market leader in El Salvador? Based on your analysis, make recommendations in order for Super Selectos to compete with Walmart. ANALYSIS • Describe the general environment that Super Selectos faces. What are the segments in the general environment that relate to Super Selectos’ situation? Segments in the general environment that impact Super Selectos are primarily demographic, economic, political/legal, and global segments. Central America has a growing economy as a region, and El Salvador is the fourth largest economy in the Central America region. Super Selectos is the largest local food retailer in El Salvador. El Salvador has several important and unique segments in the general environment. The primary segments in the general environment that Super Selectos faces are: General Environment Demographic Segment 40.2% poverty rate in many municipalities (100 municipalities with extreme poverty rates of 40.2% and household incomes averaging US $201; 146 municipalities with extreme poverty rates of 19.4% and household incomes averaging US $308; 16 municipalities with extreme poverty rates of 7.6% and household income averaging US$534 Economic Segment One of the largest growing economies in the region Fourth largest economy in the Central America region (In 2010, its GDP reached US$21.2 billion, approximately US$3400 per person) One of the main sources of income was family remittances from the US according to the Central Bank Inflation rate one of the lowest rates in the region (2.1% compared to 6.5% in the Central America region in 2010) Large increase in the price of food and transportation (7.9% increase in the price of food and 3.4% increase in the cost of transportation) Political/legal Segment Improvements in the country’s economic and social areas were backed by an anti-crisis plan: - Creation of 100,000 jobs by 2011 - Increase public employee lowest salaries and pensions 45% and 44% and the rest 6% and 8% - Enforced warranties for purchased products - The right to be reimbursed in cash when a product was defective Global Segment Increase in the size of the commercial establishments (allowed businesses to offer a greater variety of products in larger volumes) Adoption of information technology in logistics and operations management (allow retailers to lower their costs and become more efficient) • Conduct a competitor analysis and assess the levels of market commonality and resource similarity that Super Selectos has with Walmart. How will they influence competitive behavior and the intensity of rivalry? A competitor analysis is the first step Super Selectos can take in order to be able to predict the extent and nature of its rivalry with each competitor. There are two important dimensions in a competitor analysis: market commonality and resource similarity. The number of markets in which firms compete against each other is called market commonality while the similarity in their resources is called resource similarity. Because Super Selectos and Walmart are both supermarkets in the food retail industry in El Salvador, they have a high degree of market commonality in the country. Firms competing in several of the same markets have the potential to respond to a competitor’s actions not only within the market in which a given set of actions are taken, but also in other markets where they compete with the rival. Resource similarity is the extent to which the firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount. In terms of financial resource similarity, Super Selectos is the largest food retailer in El Salvador with 84 retail stores, 51% of the market and US$600 million in annual income. The table below shows the annual sales of Super Selectos: On the other hand, Walmart is the largest retailer in the world. By 2010, Walmart had 129 distribution centers each serving more than 75 stores. Walmart’ IT system allows the company to have real time information on sales, stock, deliveries by store, to manage the size and mix of the products by store based on specific customer characteristics and more. In 2006, Walmart became the owner of 51% of CARHCO and changed the name from CARHCO to Walmart Central America. In January 2010, Walmart Mexico announced its merger with Walmart Central America paying US$2.7 billion and acquiring a total of 519 stores. The following table shows the net sales of Walmart Mexico and Central America: As both tables above indicate, Walmart has a much higher degree of financial resource than Super Selectos does. Thus, although the degree of market commonality is high, the degree of financial resource similarity is low. In terms of other resources, Walmart and Super Selectos also have a low degree of resource similarity. Super Selectos has the following resources: » Strong leadership » Existing brand image and recognition » Management experience » Improved IT technology On the other hand, Walmart has the following resources: » Strong global brand recognition » Customers’ perception of low price » Strong central leadership with aggressive growth strategy » High bargaining power as a buyer » Real time information on inventory and supply » Experience in international strategy Because of the high degree of market commonality and low degree of resource similarity, the competition is more intensified for Super Selectos. Super Selectos has to constantly think of new ways to compete with Walmart, whom has more access to resources globally. However, Super Selectos is also in a strong position to compete with Walmart in El Salvador. Super Selectos is a local food retailer with a name that most people can recognize in the country. This is a great intangible asset that Walmart does not have. In addition, with Super Selectos’ strong leadership and differentiation strategy, it should be able to defend its market position even after Walmart entered El Salvador. • Considering Super Selectos’ external and internal environmental conditions, does a SWOT analysis reveal any insights to enhance the company’s efforts to compete or improve performance? Delving into the Super Selectos’ internal and external environments reveals the strengths, weaknesses, opportunities, and threats prevailing in the current situation. Strengths Strong leadership Leading supermarket chain Existing brand image and recognition Quick response to strong competitors Management experience Hi-Low pricing strategy Many stores in remote areas away from large cities Differentiated markets served: Super Selectos and Selectos Market Flexible and locally focused Many promotions Quick day-to-day sales strategy Considered number one supermarket in the country Strong revenue growth Sell many Salvadorian products Weaknesses Does not have high bargaining power as Walmart No global exposure Does not have the same level of resource as Walmart Opportunities Targets customers that live away from large cities Can potentially expand to other countries in the Central America region Provides 100% Salvadorian products to attract local customers Threats Other large global food retailer, such as Walmart Fierce competition on the rise Competitors able to undercut price and create value Rival companies with means to expand aggressively Visibility of the market Based on the SWOT analysis, Super Selectos is still in a very good position in the market. Although there are some weaknesses and threats, the strengths and opportunities seem to outweigh them. However, the weaknesses and threats will need to be addressed in order for Super Selectos to remain successful in the market. STRATEGY • Examine Super Selectos’ strategies. How can the company remain as a market leader in El Salvador? Based on your analysis, make recommendations in order for Super Selectos to compete with Walmart. Although faced with intense competition from the largest retailer in the world, Walmart, Super Selectos is in an excellent position financially and strategically. The preceding analysis adds clarity to the company’s current situation and facilitates the development of recommendations for handling Super Selectos’ most pressing strategic challenges. Alliance with Other Food Retailers in Central America Super Selectos already joined SUCAP, which was formed by owners/founders/CEOs of the leading domestic supermarket chains in Central America. In 2008 SUCAP owned 278 supermarkets in six countries with US$2.2 billion in annual sales and close to 24,000 employees. The alliance started as a broad agreement to cooperate to face competition from foreign retailers. It gradually acquired a structured organizational form, and a board of directors led by President Francisco Calleja of Selectos. There are three steps that SUCAP takes: 1. Sharing information and ideas 2. Sharing best practices 3. Utilizing a joint purchase strategy Members can use SUCAP to learn from one another and the most important thing is, to gain higher bargaining power with suppliers when the members join purchases together. This is a great strategy for smaller food retailers when they need to compete with large global retailers such as Walmart. Another recommendation can be made regarding to the alliance, SUCAP, is that the members can join IT efforts and share the development and infrastructure/equipment cost. Because it costs a lot of money for a company to purchase an IT solution (such as an Integrated Business Management System (IBMS) and a Point of Sale (POS) Information System) to manage inventory, supplies, and logistics, the cost can possibly be reduced when many retailers join together to purchase the system and the equipment. Thus, SUCAP’s members can use the consolidated buying power for an information technology solution that is usually only available to large global retailers such as Walmart. Super Selectos’ Leadership and Strategy Super Selectos has the following important strengths: » Strong leadership » Existing brand image and recognition » Management experience » Differentiation strategy » Flexible and locally focused It is critical that the leadership continuously to be responsive to customer’s demand and changing tastes. Differentiation strategy is the key. Due to Walmart’s high bargaining power to the suppliers, competing against Walmart based on price will be very difficult. Super Selectos has to be able to offer customers food and products at the best price, while differentiating itself from Walmart. For example, campaigns such as 100% Salvadorian produce will attract customers that prefer fresh local produce. Because Walmart is more likely to have a global strategy and centralized decision making system, Super Selectos should be able to respond to local consumers’ preference at a much faster speed. In addition, Super Selectos is a local store, it should be more aware of the local culture and events. Super Selectos can have different promotions that relate to them. Super Selectos should also engage in local charities to promote the retailer’s image. Based on the analysis, Super Selectos is in a good position to compete against Walmart. Although it will not be easy due to Walmart’s size, Super Selectos have a great opportunity to defend its market leader position. Super Selectos Annual Sales Net Sales Solution Manual Case for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838