Corporate Strategy for Whole Foods Market
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The strategic problems that Whole Foods Market encountered in globalizing its operations belonged to three categories. The first of these categories was the risk of currency fluctuations which resulted in massive losses through currency translation. The second of these categories was related to the unforeseeable occurrences of natural disasters which led to greatly fluctuating prices in the agricultural market. The third category was related to the bargaining pressure of buyers. Assessed from the perspective of Porter’s five forces industry analysis, Whole Foods Market operated in a high risk industry in terms of high competitive rivalry and high threat of substitutes, as shown in the diagram below:
The management at the company adopted the strategies of differentiation and cost minimization to counter the five forces. The differentiation strategy was adopted in order to eliminate the problem of low profit margins. As a result, the company diversified its product line into high value-added products such as the private label brands. However the strategy of differentiation in this case involved complex dynamics of resource development. When it comes to changing the dynamics of changing resource allocations, the management of a company has to take three dimensions into account (cited in Dess, 2007). The first of these dimensions is related to how much time it would take given the current organizational structure to develop the new product.
This development would necessitate a major investment in research and development and the financial structure of the company would have to be in a position to support that kind of investment. Adopting the differentiation strategy also necessitates consideration of the first mover advantage. For example, Whole Foods Market was releasing private label brands in the US market. The feasibility analysis would have to make sure in advance whether Whole Foods Market would get a first-mover advantage out of this. Last but not the least Whole Foods Market would have to get a sustainable competitive edge out of differentiation. This was not sustainable because competitors would also move into high value-added product lines if Whole Foods Market’s differentiation strategy paid off.
Because of the time and the complexity required to develop a high value-added product line, the management of the company diverted attention to the strategy of cost minimization. In following the cost minimization approach, the company made several new investments throughout the world in building new plants, in undertaking continuous improvement programs and in new project development. However this strategy was not worth the money because the competitive edge that developed out of this strategy was also not sustainable for a variety of reasons. First of all, this was an easily copied strategy. Therefore, competitors would also make the new investments required and bring themselves up to speed soon enough. Second, the new level of efficiency in resource allocation achieved by Whole Foods Market as a result of the cost minimization strategy would enable the company to drive out its less efficient competitors over time. In that interim however, there would be excess capacity the costs of which Whole Foods Market would have to have the financial reserves to absorb. Third, government and industrial policy varied from one country to another. Therefore differences in the regulatory infrastructure hampered effective implementation of this strategy.
It is important to look at how Whole Foods Market faced their strategic challenges. Based on the Miles & Snow model, Whole Foods Market would fall in the prospector category as it aggressively pursued international opportunities in order to diversify risk (cited in Kotler & Armstrong, 2005). The management at Whole Foods Market was prepared to try new strategies ahead of their competitors in order to get a first mover advantage out of those strategies. Therefore the degree of aggressiveness that is to be found in Whole Food Market’s strategy formulation places it in the prospector category. By following the prospector strategies, Whole Foods Market was able to address the key success factors of the industry: product differentiation, diversification in terms of sugar sourcing, and cost minimization in terms of greater control over operating expenses. The challenges that the company faced stemmed from different strategic groups in the industry such as the global, branded food and soft drinks manufacturers, suppliers of agricultural produce and the national regulatory agencies in different countries.
The importance of addressing key success factors cannot be exaggerated and the management at Whole Foods Market recognized that the only way that objectives of globalization could be met was by identifying the key success factors in that context. Operating in a low margin industry meant that the company had to differentiate its products in order to appeal to as many consumer segments as possible. Low margins necessitated lower costs of production and operations. So these were critical success factors as mentioned before. However the company’s main strategic thrust was globalization. Therefore, other critical success factors that the company had to deal with were related to the intellectual capital that employees around the world represented, and to strict compliance with legislation in every part of the globe that Whole Foods Market had diversified into.
Additional key success factors are concerned with maintaining competitiveness in terms of technological advancements and quality of service, hedging against price fluctuations of raw materials and managing worldwide logistics in terms of availability of energy, raw materials and freight. Natural disasters also impair the company’s ability to operate competitively. Other success factors include minimizing incidents of machine breakdown by ensuring safe installation, ensuring against patent infringement and developing more efficient forecasting models so that the company does not pull out of a market only to find out later on that demand went back up. The company has a lot of joint ventures and partnerships throughout the world. Managing those entities would be critical to effective globalization which in turn would facilitate minimizing exchange rate fluctuations. These are the key success factors which would determine the extent to which Whole Foods Market’s globalization strategy would be successful.
Whole Foods Market was implementing its geographical diversification strategy in order to reduce the risk of inter-currency fluctuations, one of the critical success factors as mentioned before. In this diversification strategy, the company was following the multinational framework because the natural and organic foods industry in different countries was positioned in different stages of the product life cycle. In implementing the multinational approach, the company faced three problems primarily: 1) the dynamics of competitive edge 2) predictability of the environment 3) resource responsiveness to environmental change. The company tried to deal with these problems by following the emergent approach to strategy formulation.
The international strategies that Whole Foods Market implemented were targeted towards specific problems that the management identified as competitive challenges. The international strategies implemented by Whole Foods Market focused on product differentiation and cost minimization. However these strategies had limited effectiveness firstly because the development of high value added products as part of the differentiation strategy was resource intensive and secondly because the bargaining power of buyers was very high. However the company was able to meet these strategic challenges by means of backward integration into private label brands. This helped the company reduce its reliance on external suppliers. Therefore Whole Foods Market not only diversified its operations across countries, but also established its presence across the strategic groups of suppliers of agricultural commodities and producers of processed food. These two strategies of geographical diversification and backward integration made it possible for Whole Foods Market to maintain its bottom line in a maturing industry.
International business is an area of continuing research because the benefits to be gained and the problems that can arise from internationalization of business operations are well balanced (cited in Wild & Wild, 2005). On the one hand there is the possibility of greater market share as an organization reaches out to a greater number of customers. On the other hand, there is the problem of determining as to what is the best mix of standardization and customization. This problem however is mitigated when it comes to the natural and organic food industry.
In the natural and organic food industry, consumer tastes and preferences do not vary that much from one geographical region to another. However Whole Foods Market carries both product lines and therefore stands to gain from its strategy of diversification into different product lines. In spite of this difference in terms of the penetration rates of different product categories, the problem is clearly not how much to standardize the products sold in different countries or how much to customize them to the different cultural characteristics of different countries. Customers of natural and organic food retailers like Whole Foods Market use the same products no matter in which country of the world they are marketing their products. Therefore companies like Whole Foods Market have the luxury of standardizing their products across geographical regions. This is a luxury inasmuch as costs of production and marketing are kept low as a result of standardization. However standardization has a downside in that the products tend to be low-margin.
In an intensely competitive environment, the management of a business organization has three tools at its disposal: differentiation, cost leadership and quick response (Griffin and Pustay, 2007). Companies differentiate their product lines in order to develop a unique selling proposition. Companies reengineer their business processes in order to make them more efficient and effective so that they consume less resource and as a result cost less. This drives down costs of production. Companies also experiment with different processes in order to reduce the time taken by their products to reach the market. A business organization can practice one of these strategies at a time or the organization can practice all three strategies simultaneously. In this case we see Whole Foods Market practicing both differentiation and cost minimization. First, it is moving into other product lines which have higher value added. This diversification is targeted towards taking the company into high-margin product categories.
Second, it is building new plants and consolidating existing operations in order to reduce operational costs. Therefore the company is competing not only on the basis of product variety but also on the basis of price. However the strategy of differentiation has been found to be of little success in the past because of the high level of investments required. Manufacturing is a capital intensive industry and therefore the decision to diversify into other product categories must necessarily involve extensive and exhaustive cost-benefit analyses which can answer the question as to whether there is enough demand in the market to generate the required return on investment. Even when the answer is in favor of diversifying into the higher-margin product categories, the higher margins are often lost in the overhead generated in processing the low-margin products. The management has to follow very special costing techniques such as activity based costing in order to assign the right amount of overhead to the right product lines. This is also another investment. Possibly because of these reasons, the management at Whole Foods Market found product diversification into higher-margin categories to be of limited strategic value in the past.
Cost minimization strategies followed by the company are also not working in revitalizing profits because of the considerable bargaining power of its customers. These organizational customers are corporate giants in the processed food and soft drinks manufacturing industry and, because of their massive clout arising from global market share they are able to manipulate prices of natural and organic food.
Therefore no matter how frequently Whole Foods Market consolidates and streamlines its existing business processes in order to cut costs, the margins are not going to improve by much because its influential customers will always be exerting a downward pressure on the price. Moreover, Whole Foods Market needs to have enough capital on which to ride through the period of low prices which must occur when it is trying to drive out its competitors with lower prices made possible by lower costs of production. Because of these problems, in addition to that of the time and money needed to commission the new plants worldwide, Whole Foods Market had to pull back from its globalization strategies. The company was facing problems from all three strategic groups: competition, customers and national governments whose approval was needed to set up the new plants. As a result, critical success factors related to economies of scale, lower costs and coordination stopped being effective on the global scale on which Whole Foods Market was earlier operating.
Most fast moving consumer goods industries can take lessons from the strategies used in the natural and organic food industry. Most product categories in the fast moving consumer goods industry have the same problem of being low valued-added as the natural and organic food category. Therefore manufacturers of fast moving consumer goods have to compete on the basis of price and differentiation of product lines just as Whole Foods Market was doing when it was competing internationally. Manufacturers of fast moving consumer goods such as oral care or hair care are constantly reengineering their internal business processes in order to make them more cost-effective. Sooner or later, in order to achieve economies of scale, manufacturers in this industry have to globalize their operations. Therefore they start to face the same kind of problems that Whole Foods Market did in its global operations. In this respect therefore there are valuable lessons to be drawn for other companies from Whole Food Market’s strategies.
One of the key strategic areas for businesses globalizing their operations is the area of fluctuating international currencies in relation to one another. If the foreign country in which an organization is contemplating setting up business operations has fixed exchange rates, then fluctuations are no longer a concern. However liberalization of the international capital system is forcing governments throughout the world to set their currencies loose. In this case of floating currencies, credit risk management becomes a major worry. However companies can set up operations in different regions of the world to balance for the effects of adverse fluctuations. This was what Whole Foods Market was doing. However for the companies which are contemplating going global, the case of Whole Foods Market serves to illustrate the problems that might arise.
First of all, manufacturers of low-margin products will face considerable competition. In response they will run into the same kinds of problems that Whole Foods Market did in its global operations. For these companies, cost minimization strategies will also have limited value unless they have a massive reserve of capital which will be required to drive out the competitors with low prices. They will also have to negotiate with different national governments in order to set up new plants. Therefore companies in other industry sectors in fast moving consumer goods can draw useful lessons from this case. However when applying these lessons, other companies have to keep in mind that Whole Foods Market’s customers are both organizational and individual. Therefore the bargaining power of buyers will vary to the advantage of the other companies if they are dealing with individual customers.
In the US the natural and organic food industry is still a small segment of the entire food industry. Therefore it is a critical success factor for Whole Foods Market to maintain the process of globalization. In this respect, the company could also be facing a high level of competitive rivalry from the food additives industry. Therefore the company has to conduct the process of target marketing effectively. When it comes to conducting target marketing on a global basis, the critical consideration is to decentralize the decision making process. This will enable the local management teams to maintain inventories according to the local demand conditions.
Given the high level of competitive rivalry that the company is facing, the management of the company has to study the regional market conditions carefully in order to formulate effective strategies. The current strategy at the company consists of a combination of differentiation and cost minimization strategies. However this combination is not proving to be as effective as expected because the management is not in touch with changing market conditions. Therefore the important consideration for the management team is to adapt the marketing mix to the changing market conditions. In the new context, the combination strategy of differentiation and cost minimization can be maintained.
In globalizing its operations, Whole Foods Market will be competing with industry giants such as Wal-Mart and K-Mart. Given the high level of resource availability that these companies have, it is critical for Whole Foods Market to develop niche marketing strategies so that it will be able to survive the price competition. The combination strategy of differentiation and cost minimization will facilitate implementation of niche marketing through greater product selections. The advantage that supermarkets have over retailers is that supermarkets have diverse product selections. As a result, a supermarket like Wal-Mart will carry both food additives and organic food and through the greater diversity in product selections will be in a position to address more segments of the market. Therefore Whole Foods Market has to work on its marketing mix in order to generate enough awareness in the market. Compared to the product lines carried by the supermarkets, Whole Foods Market will have a product line that is more limited in range. Therefore the company has to develop effective promotional campaigns in order to maximize the level of awareness in different markets internationally. In this respect, the retailer should also pursue long term relations with its suppliers in order to maintain low prices. This is a critical success factor for the company given the high level of competitive rivalry in the industry.
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