The Structure Of The Supermarket Industry Economics Essay

This assignment will provide a critical analysis of how a Multinational Enterprise Operates domestically but have foreign ownership by looking at how it creates value, analyzing the industry structure in which it operates and the strategies that it uses within that Industry. As the local markets throughout the world are being deregulated and liberalized foreign firms are looking to locate part of the production process in other countries where there are cost advantages. These might be cheaper sources of labor, raw materials and components or have preferential government regulation.

1.1 Foreign Ownership:

Shoprite brand is South Africa’s largest food retailing which comprises 309 Shoprite outlets. Shoprite goes as back to 1997, started as a small chain of supermarkets. Today Shoprite has managed to increase its operation outside South Africa from one store in Lusaka, Zambia in 1995, to 71 stores in 16 countries, Tanzania being among those countries that Shoprite has its operations.

In December 2001 the first Shoprite store in Tanzania was opened at Pugu Road giving a wide range of quality products at affordable prices. Currently Shoprite have four stores in Tanzania, Mlimani City in Mlimani Mall in Dar es Salaam kilombero in Arusha, Pugu Road and Mayfair Plaza in Dar es Salaam. With a wide range of products and at lower prices, always Shoprite has attracted many customers over the years.

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2.0 Analysis of an Industry Structure:

2.1The Industry

Examining the Supermarket industry through Porters 5 forces (as shown below) shows that the Supermarket industry is intensely competitive, particularly in the low price segment, this competitiveness results from a high bargaining power of consumers, meaning they are able to shop around and switch at no cost . Despite high capital requirements, the threat of entry from new competitors is high in the supermarket industry, with new planned entrants in the future years.

2.2Threat of Substitutes- over all threat Medium as industry is susceptible to changes in the economy/income.

More people choosing to go to markets and purchase their needs.

Generic substitution- Disposable income spent elsewhere, if economy enters a recession consumers are likely to spend money elsewhere ( small shops rather than in Malls and supermarkets)

2.3 Bargaining power of suppliers- overall supplier power is Low/Medium and changes with the external environment.

Food Producers have high cost of production and supermarket can easily take the advantage of this during a fall.

Large numbers of food producers -Supermarket owners are likely to find the cost of switching to other producer cheaply.

2.4 Bargaining power of consumers – overall consumer power is Medium/High

Consumers can shop around as there are many supermarkets in markets

Low switching costs for consumers- doesn’t cost anything to buy products from Game instead of Shoprite.

Creation of comparison window shopping, advertisement where consumers will easily be able to compare products prices and just pick the lowest price.

3.0 Threat of Entry from New Competitors

It is not only current rivals that pose a threat to firms in an industry; the possibilities that the new firms may inter the industry also affect the competition. Any firm should be able to enter and exit a market and if free entry and exit exists, then profits always should be normal.

The capital requirement to enter the industry is high

Many supermarkets planned to be opened in the future.

Differentiation: There is no gap in the market- already many existing supermarket.

Expected retaliation is high from existing Supermarket, could drop prices to squeeze out new entrants, as demonstrated with Nakumatt

3.1 Competitive Rivalry- HIGH

High threat of substitutes

Competitors are in balance

There are high fixed costs

There is no differentiation in the industry

4.0 External Analysis

Through analyzing the external environment is easy to understand the industry and make strategic decisions. The purpose of Shoprite external analysis is to understand what may affect the future of the company as a whole. Pastel Analysis:

4.1 Political: these refer to government policy such as the degree of intervention in the economy. In the last five years the government of Tanzania has been amending its foreign policies by providing conducive environment to encourage multinational companies and investor to invest in Tanzania. This is an opportunity for Shoprite since there is going to be free movement of labor, goods, within the east Africa countries.

4.2 Technology: New technologies create new products and new processes. Technology is fast growing in Tanzania such as introduction of ATMs, increase in number of telecommunication companies, with recently introduction of Fiber Optic internet which will give more access of information to individual people. This is opportunity to Shoprite to use the advantage of internet, radio, and magazine to market its products. For examples in last ten years there were few ATMs which bores many customers and businesspersons, because they had to make a huge line into banks for them to do transactions but now is not the same people are more reliable using ATMs which facilitates transaction. Also Telecommunication companies have introduced new technology of money transfer such as M Pesa and Zap which give easy movement of money. On line shopping, and computer aided design are all improvement s to the way the business is done as the result of technology. Through technology Shoprite can reduce costs and encourage innovation. These developments can benefit consumers as well as the organization produce the products.

4.3 Economical

These include interest rates, taxation changes, economic growth, inflation and exchange rates. The increase of fuel cost can result into high cost of production hence affects the price of product to final consumers. The global economic crisis can have a huge impact to Shoprite as multinational company in its operation likewise to demand of individual is ultimately to be affected.

5.0 Internal Analysis

To understand a successful of Shoprite, the internal strategic capabilities must be understood. This section will focus on identifying the key internal strengths and weaknesses (from SWOT). This will be achieved by examining the resources and competencies for Shoprite, applying the VRIO model to these resources and looking at the performance of various business functions within the organization.

An organization’s resources can be Physical, Reputation, Organization, Financial, Intellectual and Technological (Johnson et al, 2004) the below analysis shows the full extent of Shoprite resources and capabilities and only the key factors will be drawn upon here.

Although Shoprite has very strong branding and recognition across Africa, it does not necessarily mean that they have a good reputation or good customer relations. It is one of the low price profit making in the supermarket industry yet they have a bad reputation for not purchasing local commodities and have bad relationship with local farmers who produce vegetables. Most clients complain much on how Shoprite operates, they feel the company just takes their money and have nothing in return to society.

As referred to earlier, Shoprite has a very simple, yet effective organizational set up based on the low cost strategy which the owners feel is key to Shoprite success.

5.1 Key factors of this strategy are:

Improve distribution – over the past 12years, Shoprite has expanded its thrust northward beyond South Africa borders. Currently, 198 corporate outlets serve consumers in 16 countries outside of South Africa (fastmoving, 2009). By open more outlets allows Shoprite to widen market share which increase company profit.

By using differentiation strategy Shoprite have been able to segment its customer in different categories. Shoprite is composed of the group checkers, checkers hipper, Ushoprite save, House and home, Ok furniture and Ok franchise Division , for example Shoprite focuses on customers from the middle to lower-income consumers in the living standards measurement 3to8.

Low prices – this has attracted a large group of customers who their purchasing power is low.

6.0 SWOT ANALYSIS

6.1 Strengths and Weaknesses

The key strengths identified from Shoprite’s internal operations are their stable financial position, good branding, a responsive organizational structure, a strong management team and strong distribution operation. With the strong financial, good branding and strong management has been a motivation for the company growth. Currently Shoprite has 382 operation stores across Africa and one in India. The group continued to extend merchandise ranges upward to cater for a broadening middle class, while retaining the full selection of staple products (Annual report Shoprite). Despite the current depressed economic environment Shoprite is looking five years ahead in planning for growth, intends opening 23 stores in the 2010 financial year.

The main weaknesses are its bad reputation for not purchasing local commodities/ products and bad relationship with the local farmers and individuals. Shoprite is taking advantage of its strength (low price strategy) and key competencies (strong brand) to sustain a competitive advantage. The Shoprite (and management team) may not have the best reputation in the industry but does this matter? Shoprite has been extremely successful financially and look set to continue this success in the future, high profit and keeping costs low is the strategy that they are successfully achieving.

6.2 Opportunities and Threats

After examining the Strength and weakness it can be seen that there area a variety of factors that need to be taken to the consideration. Shoprite has already taken advantage of key opportunity buy branding and positioning itself as the first Multinational Retailing in Tanzania. After Government provide good business environment such as laying of goods regulations many foreign investor have been interested to invest in Tanzania this can be a threat to Shoprite. Also by introduction of the many banks in Tanzania that has enabled many local entrepreneurs to get loans and open mini supermarket in small towns which is the big threat since more people will be motivated to go those stores and that can reduce Shoprite market share. The key opportunity identified in this market are the increased target market from EAC (East Africa Community ) expansion previously there were only three country but now there five countries where Sudan in the process of the joining the community . Since there will be free movement of people within the membership countries hence will increase demand. Shoprite have already taken advantage of internet expansion and this will provide further opportunities ad the internet expansion (introduction of Fiber Optic) that allow online Shopping ( E commerce ) .

6.3 VRIO:

“A model which allows insight into whether the organization’s resources and capabilities translate to the potential for sustained competitive advantage” (Johnson et al)

Value

Rareness

Imitability

Organization

Physical

Yes

Yes

No

Yes

Reputation

Yes

No

Yes

Yes

Organization

Yes

No

Yes

Yes

Financial

Yes

Yes

No

Yes

Intellectual

Yes

Yes

Yes

Yes

Technology

Yes

No

Yes

Yes

7.0 Key Competencies:

Good brand awareness-Shoprite has a strong presence in the public eye which has increase awareness its brand across Africa. Likely in Tanzania Shoprite has large market share because it was the first large Supermarket to be opened.

Organizational Structure-Through jointure and opening of many branches and using low price strategy has helped Shoprite to satisfy customer needs.

Advance Technology-All Shoprite supermarkets, wherever they are` located, are now equipped with the latest scanning equipment and linked directly to the group’s main compture centre. This direct access has great improved stock control and replenishment and using the sales analysis provided enabled store management to monitor closely consume acceptance of product not previously available in a particular outlet.

Financial Stability-Despite the groble Economic recession the company total turnover has grown to 20.9%. It benefited from the employment created by the mega infrastructural projects being under taken with a view to the 2010 FIFA world cup in South Africa and the increase in the number and size of social grants.

8.0 The Economic Impact of the MNE

Mnes may affect many aspects of country’s economy -balance of payments, growth, employment objectives, and so forth. Under different conditions, these effects may be positive or negative, either for the host country or the home country. In addition, potential gains to host countries go up as local environments become more attractive for FDI.

8.1 BALANCE -OF – PAYMENTS EFFECTS

Why will Tanzania wants capital inflows? Because such inflows give the country the foreign exchange it needs to import goods and service and to pay off foreign debt. Keep in mind that FDI brings both capital inflows and capital out flows. For the government will be much concerned about the net balance of payment effect and about the possibility that when the books are ultimately balanced, the effect of their net balance of payments may be negative. Let’s see what Tanzania will benefit from MNEs.

A MNE investment in country may result in a significant injection into the economy of the country. This may provide jobs directly of through the growth of local subsidiary business such as banks, insurance. It may be initiate a multiplier process generating more income as newly employed workers spend their wages on consumption.

MNEs May provide training and education for employees thus creating higher skilled labor force. These skills may be transferred to other areas of the country. Often management and entrepreneurial skills learned from MNEs are an important source of human capital.

MNE contributes tax revenue to the government and other revenue s if they purchase existing national assets.

9.0 The Problems of Multinational Enterprises

The MNE may employ largely expatriate managers ensuring that incomes generated are maintained within a relatively small group of people. The attraction for the MNE may be the large supply of cheap manual labour who they can employ at low wages. This may contribute to a widening of the income distribution. It will also not lead to the transfer of management skills.

MNE investment in LDCs often involves the use of capital intensive production methods. Given that many LDCs are often endowed with potentially large low wage labout forces and have high level of unemployment this might be considered inappropriate technology. More labour intensive production methods might be a more appropriate option for alleviating poverty and aiding development. Any resulting growth might be considered anti-developmental.

MNEs engage in transfer pricing where they shift production between countries so as to benefit from lower tax arrangements in certain countries. By doing this they can minimize their tax burden and the tax revenue of national governments.

As many MNEs are very large and have considerable power they can next influence on governments to gain preferential tax concessions and subsidies and grants.

Outward oriented economists maintain that the cycles of poverty will not be broken from within the domestic economy. The level of investment needed to raise productivity and incomes is not possible .Thus foreign direct investment through the MNE activity is essential.

By investing in areas and utilizing the factors of production where the LDCs have an absolute and comparative advantage MNEs will lead to a more efficient allocation of the worlds’ resources. However if this leads to overspecialization and overdependence in certain sectors of the economy then the host country will vulnerable especially if the MNE decides for commercial reasons to leave the country in the future.

10.0 Action Plan for Implementation

Planning is indispensable for a company, not too ensure that they stick to plan put to know when they are deviating from it. Shoprite would need to develop a board that will deal with improving the relationship with the local communities. It would be advisable Shoprite reduce importing of vegetable from South Africa instead buy form local farmers this will reduce cost of production since all goods will be locally production hence enable to lower price. The key changes for Shoprite’s business functions in implementing this strategy would be for the production department as the majority of others aspects will be handles by the service provider.

11.0 Conclusion

MNEs play a major role in the country economy development, whoever the government should be more careful with the MNEs by putting laws that will guide them. Same time government should this opportunity as the key for developing the local industries and businesses which will increase government revenue, hence high Growth Domestic Production (GDP).