Liverpool Business School

ACADEMIC BUSINESS REPORT

Module Name: Strategic Management Module Code: MGTMEM008 Module Tutor: Lindsey Muir Joanne Meehan Neil Rotheroe

Submitted By

Raul Lozano Peralta ID #: 352812 Date: 14/03/2008 MBA (FULL TIME) 2007 2008

Table of Content
CONTENTS PAGE NO.

1. What was the basis of Marks and Spencer competitive strategy?

.. .5 1.1 External Analysis......................5 1.1.1 PESTEL Framework.. .5 1.1.2 Porters 5 Forces. .6 1.1.3 Competitors Strategy4 1.2 Internal Analysis. 1.2.1 Value Chain 1.2.2 Core Competences
2. Why did the organization suffer a downturn in the 1990s?..6

2.1 External Analysis6 2.2 Internal Analysis.6 3. What competitive strategy should Marks and Spencer seek to follow and why?...........................8 3.1 Differentiation Strategy 3.2 Segmentation Strategy. 4. Critical review and limitation of Models..10

1. WHAT WAS THE BASIS OF MARKS AND SPENCER COMPETITIVE

STRATEGY? 1.1 External Analysis: It is important to analyze the external environment of an organization in order to establish factors which may affect its present or future activities. 1.1.1 PESTEL Framework Johnson, Scholes and Whittington argue that PESTEL Framework categorises macroenvironmental influences into six main types: political, economic, social, technological, environmental and Legal. Most of the time, these are linked to each other. At the moment of M&S success, the external environment factors affected each one in a different way. M&S didnt have to cope with serious matters coming from the government and the policies that this was establishing. There was stability in this aspect of the external environment. The retail market was growing and starts to appear stronger competitors. In terms of social trends, it is always changing because of dynamism of the market, fashion trends are important when taking into account macroenvironment. In terms of technology, it is in constant development so it can be used by M&S or competitors as a tool for better production and business efficiency in all the areas within the organization. It can become a competitive advantage. Environmental factors could affect the company such as drastic weather changes which would divert the season planned sales. In addition there exists the possibility of new environment protection laws about waste disposals which could increase the operation cost of the stores

Factors

Opportunities / Threats

Low / Medium /High

1.1.2 Porters 5 forces

Potential entrants Threat of entry

Suppliers Bargaining power

Competitive rivalry Bargaining power

Buyers

Threat of substitutes Substitutes

Source: Johnson, Scholes and Whittington Cliff Bowman pg 27 the essence of strategic management argues that the rationale behind this model is that industry profitability is not determined by what the product looks like, nor whether it embodies high or low technology: it is determined by the structure of the industry. Competitive rivalry The numbers of competitors is increasing in terms of size and capability. There were competitors who started to make similar products and provide them to the same market. Oasis Next - Gap Matalan - George Tesco - Sainsbury

Similar prices but more design focused with up-to-date fashion.

Discount Stores with essential and basic clothing but at significantly lower prices. Value food (which was M&S strength)

Threat of entry It is not easy to enter to this industry, competitors would have to invest large amount of money (Capital requirements) in order to be able to compete with established and more experienced organizations. Something that benefits M&S is that in this industry there is high brand preferences and customer loyalty making this difficult for new entrants to force customers away from their existing providers. Another barrier is that new entrants will have to be able to gain access to important distribution channels which will permit them to provide the right product at the right moment to consumers, in an effective way. Threat of substitutes The clothing industry is hard to be substitute. Thus, despite the style or preferences from consumers; the need for clothing there will always be there. However, M&S has to be prepared to react to changes in preferences and tendencies in the market in order to adapt its products to them but without altering the essence of its positioning. Power of buyers Customers purchases represent the highest percentage of M&S profits being this something that increase the power of buyers. M&S products are being threatened by competitors who begin to provide similar and improved products without much difference in terms of price. This make easier for consumers to switch to other suppliers if they dont find what they are looking for. Power of suppliers At this moment Marks and Spencers suppliers were only from UK. There was a very long time business between M&S and its suppliers. M&S works closely with them being also an important human relationship, for that there was a mutual dependence. However competitors could get lower cost from oversea suppliers.

1.1.3 Competitors analysis

Future Goals Current and potential competitors:

Current Strategy

Oasis Next GAP Matalan George Tesco Sainsbury - Others What are competitors doing? Competitors from top end are offering similar prices for more design focused with up-to-date fashion. Competitors from bottom ends are penetrating into the retail market with discount policies offering value food and basic clothing but at significantly lower price. What are competitors capable of doing and how would them respond when challenged? Some of them are capable of using cut-cost strategies in order to get more market share and focus on specific segments which have not been exploited yet. What moves might competitors make? Competitors might go to other countries where labour cost is lower in order to be able to provide similar items but much cheaper. Some competitors might reinforce the range that M&S has not been focused on appropriately. They might take expansionist strategies going to other markets which could provide better profits and increase brand value. Where are competitors vulnerable? An advantage that M&S has is the value and image of his brand. This is something that competitors will find difficult to outstand, at least during the short term.

Assumptions

Capabilities

Adapted from module handouts 1.2 Internal Analysis: 1.2.1 Value chain Value chain is an analytical model which explores the tasks and roles within the overall process of delivering customer satisfaction. Value chain identifies the linkages and interdependencies between suppliers, buyers, intermediaries, and end-users. Gattorna and Walter Managing the supply chain

Firm Infrastructure: There was a top-down management and store managers had to followed central direction on merchandising, layout, store design and other important decisions. There was an autocratic approach.. Human Resources Practices: Staff were treated better and paid more than sales assistants in competitors companies. Also, there was a good human relationship with staff. However, store managers could never challenge policies and decisions even though they were concerned about the negative effects.. Technological Development:

Spo up F irm

M&S emphasises high quality products at reasonable prices, encouraging suppliers to use efficient and modern production techniques. The company designed their products under the brand name St Michael. Procurement: M&S used always the same UK-based suppliers.

H mn u a

Inbound Logistics: M&S worked closely with suppliers in order to find a more efficient way of production and delivery of the inputs. Outbound Logistics: Its specialist buyers operated from a central buying office from which goods were allocated to the stores. Marketing&Sales Every M&S store was identical in the distribution and procedures it followed. M&S stocked generic clothing ranges with a wide appeal to the public. Service Because the stores didnt have fitting rooms until the 1990s, all assistants had to carry tape measures and the company would give a no quibble refund to any customer who was unhappy with the product purchased. 1.2.2 Core competences Campbell, Stonehouse and Houston mention that core competence or distinctive capability is an attribute, or collection of attributes, specific to a particular organization which enables it to produce above industry average performance. They add that it arises from the way in which the organization has employed its competences and resources more effectively than its competitors. One of M&Ss strongest competences was the selective quality of the products they provide to its customers, and the strength of its brand. Another important aspect that made the organization successful at this time was that there was a feeling of camaraderie and a close-knit family atmosphere within the stores. The organization employed staff whom managers believed would fit in and become part of this family. This would help to motivate the staff to provide a friendly and helpful service to consumers in order to create a greater shopping comfort to customers. There was also a good human relation with customers, suppliers, and communities. It was the effective coordination among all the groups involved in bringing a product to market that result in an important core competence Bob de Wit and Meyer conclude that core competences are also the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.

2. WHY DID THE ORGANIZATION SUFFER A DOWNTURN IN THE 1990s?

2.1 Internal Analysis By analyzing M&S mistakes during the downturn, it can be drawn that most of these mistakes were made from inside the company either by wrong structure, strategies, focus or lack of reaction to market changes Based on support activities, some wrong approaches were detected: There was a structural problem, too much centralized authority; for this, policies and decisions were always unchallenged even when manager were worried about the negative effects. This autocratic approach started to make decision making very slow. As a result, Store managers were severely restricted in how they could respond to the local needs of customers. In addition, while competitors were reacting very quickly to changes, M&S continued too long with its traditional risk-averse formula and ignored the changes and dynamism in the market place. There was a static environment in the headquarters culture, with no modern management techniques, no longer compromised with the new strategies that the business had to take in order to stop the downfall. This lack of reaction started to affect employees morale. Also, there was not much contact between managers with staff at the stores with the aim of changing the bureaucratic image that was being perceived at this time in the company. Another wrong strategy perceived when analyzing M&S downturn was that the company was focusing on the day-to-day operations of the firm rather than long term strategy. In addition, within the organization there was no culture of innovation, it was always the same and was never permitted a CEO from outside who could provide new ideas based on the experience gained in other similar businesses. Another mistake made by M&S, it is that it had a generalized view of the market; therefore they didnt segment its consumer in order to have a better perception of them Finally, the company had its overseas stores presenting losses most of the time, letting them to develop their own strategies, demonstrating with this that there was a poor coordination between them and the rest of the organization. Based on primary activities, the following wrong approaches were perceived: At the time of the downturn M&S had a high reliance on its suppliers from UK. M&S started to have storage problems. The organization incurred into over-estimated sales having to get rid of this excess stock by following heavy discounts for a quick sale in order to save space for new season products. This would affect its image.

Likewise, M&S made important mistakes related to sales and marketing activities. For instance, there was not a lifestyle approach in order to have a better product presentation and all merchandise was place together. In addition, allocation of merchandise depended on floor space. M&S didnt use an appealing mechanism to attract consumers by using the front of the store. As a result Stores were not attractive nor well designed in terms of proper layout, display, colours, and lights. As the case study mentions, at the moment of the downturn, there was not a proper marketing department in charge of developing a customer-focused approach with the purpose of collection and understanding customers preferences and tendencies. . As a result of this misleading strategies and lack of reaction, customers satisfaction started to decrease steadily. M&S didnt understand and react to its customers needs. Customers were not happy with the clothing range that M&S was releasing and were so disappointed for not being able to found the goods they wanted in M&S stores. To make it worse, M&S lost the confidence of its core customer which was the classically stylish woman who admired and relied on M&S. Womens range started to be considered too old-fashioned and boring. In terms of service, M&S also made some unfortunately decisions as trying to control costs by reducing the number of full time sales assistants, something that would affect customers comfortably during their shopping experience. Finally an important underexploited area within M&S was financial services operations. Despite its strong brand recognition, Marks and Spencer didnt have a loyalty card, something that competitors were taking advantage of. The use of this card would have permitted the organization to obtain more relevant information about its customers. 2.2 External Analysis The organization didnt realised some external environmental changes as social trends. Competitors were the ones that quickly reacted to the changes permitting them to developed their owned strategy of differentiation. Some of them followed low prices strategy. To succeed on this, the most important competitors started to use overseas suppliers where labour cost was much lower. Some others preferred to follow more designed focus differentiation with more fashionable products but similar prices to M&S. M&S didnt have the capacity to perceive these external threats. Taking advantage of many niches M&S was under exploiting, competitors started to take better positions and grow gaining considerable part of the market share that M&S began to lose. For all this, the threat of entry by competitors started to be higher, new competitors may realise that with a proper strategy approach it could be possible to gain market share that others drop due to their wrong decisions making and lack of reaction to customers trends.

In addition, Consumers started to have more options to choose; therefore the power of buyers increases. M&S customers begin to lose confidence on the brand. Consumers dont depend on only one important supplier; if they dont like what a store offers them, they wouldnt hesitate to go to the competitors offer. There is no threat of substitutes at this moment; the most important threat for M&S was the competitive rivalry. M&S current suppliers at the time of the downturn were still loyal due to the close and long relation with the organization. Therefore, there is not a tendency to higher power of suppliers. .

3. WHAT COMPETITIVE STRATEGY SHOULD MARKS AND SPENCER SEEK TO FOLLOW AND WHY? Before establishing any strategy, it is important that Marks and Spencer have an adequate structure which permits to apply properly these strategies. The company needs to define a manager structure which facilitates a better communication within all the departments and stores in order to create a more integrated environment. Bureaucratic has to be replaced by a flat structure which permit executives be closer to the market and therefore allow M&S to be more responsive to market changes and customer needs.

CEO

Beauty Manager

Home Manager

Food Manager

Lingerei Manager

Womeswear Manager

Menswear Manager

Childrenswear Manager

Once M&S has defined and established the adequate manager structure for the company, it is important to start designing the competitive strategy to follow. Cynthia Hardy pag 52 define strategy as the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue the kind of economic and human organization it is or intends to be, and the nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers, and communities. Based on the graphic below, Johnson, Scholes and Whittington mention that routes 1 and 2 represent priced-based strategies, route 4 represents differentiation strategy, route 3 represents the hybrid strategy, route 5 correspond to focused differentiation strategy, and finally routes 6,7 and 8 represent failure strategies

Adopted from Johnson, Scholes, Whittington pag 243 . Having analysed M&S situation, the strategy more suitable for the companys success is the routes number 3 and 4. Even though some competitors are focusing on cost leadership strategies, M&S shouldnt follow this strategy because its objectives and strengths are not the same. 3.1 Differentiation Strategy M&S should apply a strategy of differentiation in which they emphasize its main qualities and strengths such as the recognition of its brand and the high quality, well designed and attractive merchandise that they provide. Mintzberg and Quinn mention that differentiation is a supply-driven concept, rooted in the nature of the product itselfwhat is offered to the market.

In terms of differentiation strategy, Mintzberg and Quinn pag 88 argues that an organisation distinguishes itself in a competitive marketplace by differentiating its offerings in some wayby acting to distinguish its product and services from those of its competitors. An organization can differentiate its offerings in six basic ways:

QUALITY QUALITY DESIGN SUPPORT IMAGE PRICE PRICCE Adopted from Mintzberg and Quinn In the case of M&S, Quality and Design differentiation strategy are the ones to be followed. M&S need to differentiate its products from the others basing this on the quality and design, and also in the strength and recognition of its brand. However, to revitalize the brand; it is important to transmit a new corporate image through the new and innovated style of its merchandise and workforce. Mintzberg and Quinn pg 90 add that quality differentiation has to do with features of the product that make it betternot fundamentally different, just better. The product performs with, greater initial reliability, greater long-term durability, and/or superior performance. Meanwhile, design differentiation is when an organization offers something that is truly different, that breaks away from the dominant design if there is one, to provide unique features. The design and quality of M&S is wide recognized, however even though the company should keep its classic style, there should be a constant injection of innovation based on customer preferences and avoiding their clothes to look boring. This would also help to rebuild confidence with its core customers, the classically stylish woman who admired and relied on M&S. Johnson, Scholes and Whittington pg248 mention that by using the hybrid strategy, companies seek simultaneously to achieve differentiation and a price lower than that of competitors. M&S managers should consider this option as well. The company by using oversea sourcing, its getting its products at lower prices than ever before. But, it doest mean that the quality has to be affected. M&S can take advantage of the low cost of its merchandise to have a strong position and response to competitors strategies.

So, even though the main objective of the company should be to differentiate and highlight its products from the competitors, it is important that M&S find the way to keep its costs as low as possible but without affecting the quality of its products, service, and staff. 3.2 Segmentation Strategy When focus on demand driven-concept; it is important to take into account Scope strategies. Mintzberg and Quinn. The cope strategy that would be very important to M&S to adopt is the Segmentation strategy M&S is working with different segments such as beauty, home, food, lingerie, womeswear, menswear and childrenswear; therefore it will deal with different variety of consumer and preferences. Some organizations seek to be comprehensive, to serve all, others to be selective, targeting carefully only certain segments. M&S should be more selective, do a clear segmentation of the market based on the products that the company provide and the type of potential consumers that demand these products. M&S need a clear focus and reinforcement of the segments, for instance, in the case of Per Una clothing range; the segment is targeted woman 25-35 who wish to wear designer-style clothing. All the products that M&S release to the market should be focus on an specific and clear segment in order to avoid generalization and cannibalization. In addition, each segment should have its own space within the store and use appealing mechanism to attract customers. To conclude, M&S has strengths that competitors dont, and should make the best use of them. M&S has to be aware the best strategy that they choose has to be the one which permits the organization a better focus, relation, and understanding of customers preferences and needs. It would be also important the creation of a department dedicated to identify new business opportunities by establishing a culture of innovation within the organisation. The use of the loyalty card &S , it is a great opportunity to collect relevant information about consumer trends, permitting a closer relationship with them. M&S should keep strong enough all its products ranges, specially its classically styled clothing which has its most loyal customers. It will be also necessary to have an integrated information system, which would be a great support to make decisions faster and communicate knowledge, ideas and expertise within the organisation more efficiently.

4. CRITICAL REVIEW AND LIMITATION OF MODELS

A macroenvironmental analysis has its limitations and pitfalls. According to Campbell, Stonehouse and Houston pag 117 the macroenvironment can be extremely complex and at any one time there may be conflicting and contradictory changes taking place. The pace of change in many macroenvironmental situations is increasing and becoming more turbulent and unpredictable. This degree of uncertainty has, to some extent, cast some doubt over the value of carrying out a macroenvironmental analysis at all. By the time that an organization has come to terms with one major change in the macroenvironmetn, another change often occurs that requires even more attention and action. Despite its limitations, macroenvironmental analysis is a valuable mechanism for increasing the strategic awareness of managers. For instance, in the PESTEL model the factors are not independent of each other, most of them are linked.so understanding how PESTEL factors might impact on and drive change in general is only really a starting point.Johnson, Scholes and Whittington suggest that managers need to understand the key drivers of change and also the differential impact of these external influences and drivers on particular industries, markets and individual organizations. They also add that it is particularly important that PESTEL is used to look at the future impact of environmental factors, which may be different from their past impact. Where there are high levels of uncertainty about future changes in the environment scenarios may be a useful approach. The PESTEL factors are of limited value if they are merely seen as a listing of influences. It is important to identify a number of key drivers of change which are forces likely to affect the structure of an industry, sector or market. Johnson, Scholes and Whittington It is usually difficult to identify the significant factors in the external marketplace environment which are likely to affect an individual enterprise. As mentioned before, there exist many external influences. They tend to be constantly changing in our unstable environment, and may present potential opportunities at one point in time and potential threats at another. Another model developed in this report is Porters five forces. John Kew and John Stredwick pag 21explain that Porters five forces model, unlike economic models, the value of this model lies not in its predictive ability, but in the way in which it provides a checklist whereby particular firms can clearly analyse and define their own position in relation to their own industry. It is a tool which can be used as the first stage of strategic analysis Gordon Preston pag 136 mention that Michael Porter himself suggested, a sixth force in this model is missing in some situations; this is government regulation which can often be the most important factor in determining the profitability of an industry. For instance; pharmaceuticals and airline industries. .In relation to value chain the greater the synergies between the various elements of it, the greater the added values. The main objective of a strategy should be to strengthen the value chain as a whole, by building on existing strengths, or correcting weaknesses.

John Kew and John Stredwick pag 21 argue that the strength of the value chain technique is that it forces an analysis of how the organization actually functions, and it avoids over-concentration on some of the more obvious strategic possibilities like merger or takeover. The weakness is that it is exclusively inward-looking. It should be combined with a rigorous analysis of fit the environment. They add that for example, the primary part of the chain might be strong, but the organization might have problems caused by high turnover of staff. The strategic choice here would be to concentrate on improving staff turnover using HR techniques. Alternatively, the product might be strong, but its reputation is let down by poor aftersales service. After digging deeper, it might be discovered that the IT systems supporting service are inadequate.

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