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The impact of market structure on Watsons/Superdrug is significant in the
monopolistic market. Watsons/Superdrug has been the leading retailer in Hong Kong
and UK respectively. The level of competition in both locations of the monopolistic
competition market is high with many sellers offering similar health and beauty
products, compounded with a low barrier to market entry. Growth of sales is not
affected by the growth in competitors. But actual and potential competition limits
Watsons/Superdrugs pricing power in the market. They have to price their product
competitively within a narrow price range, and profit is therefore also restricted. To
increase pricing power, Watsons and Superdrug invested much expense to create
competitive edge through R&D, advertising, brand-loyalty, operation to differentiate
their products. Watsons/Superdrug manages to optimize these costs based on its
global network and a strong team to manage each of the above aspects efficiently. As
differentiation also generates certain wastage, such as packaging of own brand
product to attract customers, buyers may end up paying higher price. Since similar
health and beauty products can be produced by a large number of suppliers and
customers are numerous, market entry barrier/cost for new entrants is low. This also
increases competition to Watsons and Superdrug, which may affect or reduce sales
volume and profit.
3.2 Illustrate the way in which market forces shape organizational responses
using a range of examples
Market forces illustrate the relation between supply and demand within a market.
Organizational response is the reaction given by a business or a company to a
business or economical circumstances. Organizational response to market forces has
great impact on the companys reputation and profits. Most of the successful
companies do proper market research and analysis to ensure that they are able to
provide service or products to their customers. Watsons and Superdrug has been able
to judge the market demand for their products correctly which keeps their customers
happy by supplying products in right amount what customer want. The profit of
Watsons and Superdrug is increasing as they judge their margin correctly to be able to
supply and sell as much of their products as possible without over stocking, bringing
added finance to the business. Some of their branches are facing loss as they judged
very poorly. As a result they are either leaving customers empty handed as not enough
products has been supplied or leave their business overstocked as customers dont
want the quantities supplied. If Watsons or Superdrug are not able to satisfy its
customers the reputation may be tarnished. The relationship between market forces
and organisation response is therefore paramount in terms of business success and
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customer satisfaction. It is also important to continue in monitoring market forces to
ensure that an organisation can respond to any changes in market conditions. More or
less product may be needed to match customer demand during different market
seasons.
Supply and demand is one of the most fundamental concepts of economics and
constitutes the backbone of a market economy. Demand refers to how much (quantity)
of a product or service is desired by buyers. The quantity demanded is the amount of a
product people are willing to buy at a certain price; the relationship between price and
quantity demanded is known as the demand relationship. Supply represents how much
the market can offer. The quantity supplied refers to the amount of a certain good
producers are willing to supply when receiving a certain price. The correlation
between price and how much of a good or service is supplied to the market is known
as the supply relationship. Price, therefore, is a reflection of supply and demand.
Economies of scale can be classified into two main types: Internal arising
from within the company; and External arising from extraneous factors such as
industry size. Economies of scale can arise in several areas within a large enterprise.
While the benefits of this concept in areas such as production and purchasing are
obvious, economies of scale can also impact areas like finance. For example, the
largest companies often have a lower cost of capital than small firms because they can
borrow at lower interest rates. As a result, economies of scale are often cited as a
major rationale when two companies announce a merger or takeover. However, there
is a finite upper limit to how large an organization can grow to achieve economies of
scale. After reaching a certain size, it becomes increasingly expensive to manage a
gigantic organization for a number of reasons, including its complexity, bureaucratic
nature and operating inefficiencies.
The substitution effect is the idea that as prices rise (or income decrease)
consumers will replace more expensive items with less costly alternatives. Although
in general, the substitution effect very negative in nature, as it limits choice. Examples
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of the substitution effect in action can sometimes be observed over the winter holiday
season, where, in lean economic times, discount retailers often hold up well.
Conversely, as the wealth of individuals increases, the opposite tends to be true, as
lower-priced or inferior commodities are eschewed for more expensive, higher-quality
goods and services - this is known as the income effect.
Watsons and Superdrug often faces high demand elasticity, i.e. a relatively high
% change in demand over a % change in price. High demand elasticity is not good as
profit margin will be reduced. When the price of Watsons/Superdrug products is
increased even marginally, demand drops quickly as customers switch to similar
products available in the open health beauty market. They may even look for
substitution such as lower cost products. Decrease in sales volume will heavily affect
profit margin. Conversely when the price of Watsons/Superdrug products is
discounted even slightly, demand or sales increases noticeably as customers are able
to gain much saving form the daily consumables and regularly used health beauty
products. To keep down demand elasticity, Watsons and Superdrug provide product
differentiation to maintain sustained demand from their customers and also increase
their loyalty by branding. Watsons own-brand product has a moderating effect on
demand elasticity which generate a healthy demand situation. Therefore, investment
and promotion of own-brand product will have a long term stabilizing effect on
market forces. Due to availability of suppliers to Watsons and Superdrug, supply
elasticity for to their products generally is high. This is good for Watsons/Superdrug
as suppliers are able to cope with demand change and respond quickly through
adjusting production level. However the demand situation must be monitored
effectively, Watsons and Superdrug has to develop comprehensive information system
to record sales and inventory, as well as training staff with multiple skills or
outsourced partners to monitor the supply/price situation.
3.3 Judge how the business and cultural environments shape the behavior of a
selected organization
PESTEL analysis is one of the common tools for considering external factors or
conducting an external strategic analysis for market research. It represents an acronym
of 6 factors - Political, Economic, Social and Technological, Environmental and
Legal. It provides a framework describing various macro-environmental factors used
in the environmental scanning component of strategic management for a company.
These factors, when combined with external micro-environmental factors and internal
drivers, can be regarded as opportunities and threats in a SWOT analysis. It is a useful
tool to understand market trend, business potential and positioning for a companys
future operations.
Political factors are current and potential influences from political pressures,
mainly from the government interventions on the economy. For example, tax policy,
labor law, environmental law, trade restrictions, tariffs, and political stability. Political
factors also include goods and services which the government wants to or does not
want to provide or be provided. In addition, government policies have strong
influence on health, education, and infrastructure sector of the society. Political
factors of China and UK/EU countrys political stability may affect the business
environment that Watsons and Superdrug are operating in. For HK/China it has been
relatively stable amid minor interruption such as Occupy Central movement. So effect
of political issues on Watsons is rather small. However in recent years, CK Hutchison
has made conscious effort of selling assets in HK (retail ParkN Shop) and China
(real estate), with the announcement of diversifying portfolio to Europe etc. But
critics had opined that it was fundamentally due to the weaker tie of Li Kai-shing with
the new generation of leaders in China. Despite the groups direction, retail business
including Watsons is up in Asia and particularly China showing the strongest growth
in retail revenue among all regions (2014 Total Revenue increased +14%, with
excellent year of EBIT growth of 18%. Average new store cash payback period is less
than 10 months).
Social factors in the external strategic analysis refer to ways in which the society
can affect an organization. It includes cultural aspects, health consciousness,
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population growth rate, age distribution, career attitudes and emphasis on safety. For
example, trends in social factors may affect the demand for certain products. An aging
population may imply a smaller and less-willing workforce leading to increased labor
cost, or companies may adapt by changing management strategies to allow recruiting
older workers. For Watsons and Superdrug, the social factors create higher demand
for health and beauty products in general. Higher awareness of health needs, greater
emphasis on beauty/personal image, increased affordability and the rapidly ageing
population all contributes to a greater demand of health and beauty product. Across
Asia and Europe/UK, the trend is similar although with different social background.
Economic factors include the local, national and world economy impact on a
business or an organization, such as economic growth, interest rates, exchange rates
and the inflation rate. These factors have major impacts on business operation and
decision makings. For example, interest rates affect directly the capital cost and
therefore determine the extent of business growth and expansion. Exchange rates
affect directly the price of imported goods as well as the costs of exporting goods.
Again the China and UKs economic growth, interest rates, exchange rates and the
inflation rate has important impact on Watsons and Superdrug. It directly affects
Watsons/Superdrugs sales, cost of production, cost of borrowing, operation and store
development. It is one the major area of concern from the management to mitigate
any negative effect due to the economic situation of HK/China and UK including EU.
Technological factors refer to the effect of new and emerging technology, such as
automation, technology incentives and R&D activities, etc. These can determine entry
barriers, minimum efficient production level and influence outsource decisions.
Technological shifts can also affect costs, quality, and lead to innovation. This factor
has generally low impact on general product but become more important for the
higher end quality product, which Watsons and Superdrug ought to develop a
competitive advantage through differentiation. High end health and especially
cosmetic always uses technological advances as selling point, such as nano-
technology for skin care etc. A widely recognised advance in these areas may prompt
significant sales and profit margin. Watsons and Superdrug shall engage in R&D to
make sure they are not left behind in terms of these technological advancements
especially when the competitors are pursuing this direction, notably in European
cosmetic development.
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farming, and insurance. Furthermore, growing awareness of the potential impacts of
climate change is affecting how companies operate and the products they offer, both
creating new markets and diminishing or destroying existing ones. For Watsons and
Superdrug, this factor is mainly on production and packaging aspects. It may add to
the cost of production.
Legal factors include the effect of national and world legislation, such as various
legislature and gazette on discrimination law, consumer law, antitrust law,
employment law, health and safety law. For example, licensing requirements for
individual business sectors are important means of regulation which heavily affects
business activities and associated costs. These factors can impact significantly how a
company operates, its costs, and the demand for its products. This factor affects
Superdrug more than Watsons as Superdrug in UK is bound by EU regulation. The
impact is most profound in safety of health cosmetic products, and ban on animal
testing.
In addition, other factors for an external strategic analysis may also include
Demographic factors such as gender, age, ethnicity, languages, disabilities, mobility,
home ownership, employment status, religious belief or practice, culture and tradition,
living standards and income level, etc; regulatory factors such as local council and
government by-laws, parliament acts and regulations, international and national
standards, etc. Ethical factors are those considered as upheld belief and moral
standards widely accepted in the industry based on human rights, equity,
environmental grounds, etc. For example, Company are obliged to adhere to ethical
practice such as corporate social responsibility frameworks, race/age/child/women
workers equity, sustainable logging practice to protect natural environment or
ecology.
International trade is very important for every nation as it is not possible to grow
or produce all goods or services within a country. Some goods are available in some
countries, so it needs to exchange the products and services which are not possible to
execute without international trading. International trading is very profitable and
economic. The potential reasons or benefits of international trade are as follow:
Lower Costs: By trading in other countries, the company may gain many cost
advantages. It may be able to lower production cost by better access to inputs (labour,
raw materials, energy and even building at lower rate) because of greater buying
power. Overseas expansion means buying supplies in greater quantity, therefore offers
greater leverage when negotiating prices with suppliers. Also the higher volume
attains a better economy of scale in all aspects of operations from R&D to
distribution, will all lower cost of sales.
Materials: for many productions, UK largely depends on other countries. Many raw
materials are comes from other countries like banana and mango did not grow in the
UK and for those products UK have to export from hotter countries. Similarly many
countries need expensive and luxurious materials like arms, cars, engines which they
import from UK. It is quite tough to be self-dependent in all sectors. International
trade gives the opportunity to exchange products otherwise there will be very scarce
choice for each nation.
International growth Export companies may achieve higher level of growth which is
otherwise not possible with just the domestic market. As mentioned in 3.3, the
political relationship in China prompted CK Hutchison to seek international growth
actively. This may also greatly enhances the Watsons brand image and uplift to
international label status through Asia and Europe. Watsons and Superdrug can both
offer greater variety of choices to customers through imports across regions.
Diversifying business risk Business risk refers to the potential that an operation
might fail. It is dangerous for a business to operate in only one country. Dont put all
of your eggs in one basket also applies to business. If a company is completely
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dependent on one country, negative events in that country could ruin the company.
Business risk is reduced when a company is involved in multiple countries or
competes in a variety of international markets. Following the recent new direction
international growth, CK Hutchison group started to buy assets in Europe in 2011
including a Holland pharmacy chain, European assets in the group now account for
42% while Greater China is down to 30% (2012). This allows Hong Kong based
Watsons to expand beyond Asia to Europe, as CK Hutchison Group is seeing a weaker
tie with the leading reign of China leadership. Business risk for Watsons in
Asia/China is much reduced and more evenly spread out globally.
The benefits of international trade and investment are not certainly without risks,
though and setting up overseas may not move as quickly and successfully as
anticipated. International business is heavily subject to political and economic risks.
Local customs and legislation can slow things down and a change in policy, cultural
difference and exchange rate risks may hinder businesses looking to expand.
Political risk - Investing in different countries, political regimes can change over time
also poses a few risks. Government could discriminatorily change laws, regulations or
contrast governing an investment, interest in emerging markets has soared and host
countries have learned more value can be extracted from foreign enterprises through
regulatory control. Firms engaged in international business use a combination of legal
contracts, insurance and trade in financial instruments to protect income streams.
These approaches, however, offer little protection against policy risk. For Watsons in
Asia/China, the political risk is relatively small due to overall stability. But as part of
EU, Superdrug will experience some impact due to the recent political unrest in other
EU member countries such as Greece. Exposure shall be restricted to these location to
avoid drastic losses.
Economic risk refers to the potential for a countrys economic conditions and policies,
property rights protections, and currency exchange rates to harm a firms operations
within a country. Because economies are unpredictable, economic risk presents
executives with tremendous challenges. Exchange rate risk is particularly important to
international business. Because when exchange rates fluctuate, business trading in
foreign currencies becomes risky as company cannot forecast finances accordingly.
Currency fluctuations could affect either the value of existing assets or liabilities
denominated in foreign currency, this could ultimately result in a business becoming
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less competitive overnight, resulting in a loss of sales and loss of revenue. Financial
executives for Watson which has extensive global business in many different
countries must take stock of these various dimensions and try to anticipate how the
dimensions will affect the business.
Cultural risk refers to the potential for a companys operations in a country to struggle
because of differences in language, customs, norms, and customer preferences. It
could create problems for business wanting to trade overseas. UKTI states failure to
take into account different cultures might lead to damaging and costly mistakes. This
could range from causing offence by not observing correct protocol, to inappropriate
packaging and marketing. It goes without saying that the marketing of certain
business in one western country might differ to that of a country that is still
developing and has differing cultural habits and beliefs. For both Watsons and
Superdrug, the business faces certain cultural risk as the product is to be sold to many
region of different language, religious and ethnic background. Careful advertising,
labelling must be diligently carried in each region to avoid cultural conflict, such as
halal provision and use of pictures and terminology in advertisement or commercials.
This is in particular importance to region of highly mixed ethnicity, such Malaysia,
Singapore, Europe.
Emerging market has the characteristic of cheaper costs and higher growth. It
posseses significant impact in form of competitive advantages primarily associated
with lower labour cost, such as the emerging superpowers of China and India. If a
business set up a production base in these countries, it will enjoy cheaper cost. In
addition, if a business export to an emerging market, it will enjoy higher growth due
to the large demand. For Watsons/HK, the low China labour cost gives Watsons
product a cost advantage, while poses a threat to Superdrugs local product. As a
group Watsons can reduce the impact by strategic product branding to optimise cost
advantage to value products, while minimising cost disadvantage to higher end
products which has a bigger price tag but lower labour pricing component.
References
Ahern, R.J. & Fergusson, I.F. (2010) World Trade Organisation (WTO): Issues in the
Debate on Continued U.S. Participation DIANE Publishing
Morrison, Janet (2011) The global business environment: meeting the challenges
3rd ed., Palgrave Macmillan
Gordon, Alan (1953) In association with the institute of risk management 2nd ed.,
Alan Gordon
Wall Street Journal 7 Sept 2015 Li Ka-Shing Timely sell-off of China assets
accessed 2015/9/8
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Sloman, John (2008) The business environment 2nd ed., Prentice Hall
Kerr, William A. (2014) A guide to the global business environment; the economics
of international commerce Nicholas perdikis
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Brooks, Ian (1995) The international business environment Harlow, England :
Prentice Hall
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