The Swedish Organic Food
- A Competitor and Industry Analysis -
Bachelor’s thesis within Business Administration Author: Jonas Deichmann
Tutor: Hamid Jafari Jönköping May 2012
We would like to take the opportunity to thank everyone that contributed to the completion of our thesis.
First of all, we would like to thank our supervisor, Hamid Jafari, who always gave us constructive feedback and guided the whole thesis-writing process in a very good and helpful manner.
Second, we are very thankful for all the companies and their respective spokes- persons that we interviewed and to which we sent our questionnaire. Without their help, the content and validity of this thesis would have been poorer.
Last but not least, we are grateful for all the feedback we got from our fellow stu- dents.
Jonas Deichmann Sarah Fitz-Koch Samuel Gauger Jönköping International Business School, May 2012
Bachelor’s Thesis in Business Administration
Title: The Swedish Organic Food Market
Author: Deichmann Jonas, Fitz-‐Koch Sarah, Gauger Samuel
Tutor: Hamid Jafari
Subject terms: Competition, Swedish Organic Food Market, Strategy, Strengths
and Weaknesses, Positioning
The organic food market in Sweden has grown continuously in the last decades. This led many retailers and small stores to start selling organic food as well as ex-‐ tending their organic food assortment and variety extensively. In this thesis our purpose was to analyse the Swedish organic food market in terms of competition and business level strategy. The two main players in the market (ICA and Coop) were chosen to be analysed in more detail as well as a local store (Bikupan). The results of the local store were generalized for other small and local stores in Sweden. This was done to get a better picture of the market and about how the companies in the Swedish organic food market compete with each other.
Our data was collected by doing three semi-‐structured interviews, two with Coop and one with Bikupan. Furthermore, we sent out one questionnaire to ICA. In the case of Coop, we interviewed the manager for sustainable development and one specific Coop store due its interesting concept “Green Room” where almost only organic food is sold. The answers were then linked with our general findings about the market as well as our theoretical framework and the following findings were made:
o ICA and Coop are the main competitors followed by Axfood o there are not many differences between ICA and Coop o competition is to some extent based on price
o increasing pressure on small, local stores due to the main players’ ever in-‐
creasing market coverage
o ICA is closest to be the cost-‐leader, whereas Coop is somewhat more focus-‐
ing on differentiation. Small, local stores are truly differentiated compared to Coop and ICA.
Table of Contents
Introduction... 11.1 Background... 1 1.2 Problem Discussion ... 2 1.3 Purpose ... 3 1.4 Research Questions... 3 1.5 Perspective ... 3 1.6 Definitions... 3 1.6.1 Organic food... 3 1.6.2 KRAV... 4 1.7 Methodolgy... 4
Frame of References ... 5
2.1 Retail channels... 5
2.2 Porter’s Five Forces ... 6
2.2.1 Threat of New Entrants... 8
2.2.2 Rivalry among existing competitors... 9
2.2.3 Bargaining Power of Buyers ...10
2.2.4 Bargaining Power of Suppliers ...10
2.2.5 Threat of Substitute Products ...10
2.3 The Components of a Competitor Analysis ...11
2.5 Porter’s Generic Strategies ...14
2.5.1 Cost leadership strategy ...15
2.5.2 Differentiation strategy...16
2.5.3 Focus Strategies...17
2.5.4 The pursuit of more than one generic strategy ...18
2.6 Summary of Frame of References...19
3.1 Choice of method...20
3.1.1 Literature review...20 3.1.2 Case study ...21 3.2 Interviews ...21 3.2.1 Interview selection...23 3.2.2 Observations...24 3.2.3 Data collection...24
3.3 Method for analysis...25
3.4 Evaluation of method ...27
3.4.1 Practical Problems ...27
3.4.2 Validity & Reliability of the Methods...27
4.1.1 Case 1: ICA ...29
4.1.2 Case 2: Coop ...30
4.1.3 Case 3: Bikupan ...30
4.2 Competition in the Swedish organic food market ...31
4.2.2 Coop’s competitive situation ...32
4.2.3 Bikupan’s competitive situation...32
4.3 Strategic positioning...32
4.3.1 ICA’s strategic positioning ...33
4.3.2 Coop’s strategic positioning...33
4.3.3 Bikupan’s strategic positioning ...34
5.1 Competition in the Swedish organic food market ...36
5.2 SWOT analysis...39
5.2.1 Opportunities and threats in the external environment...39
5.2.2 ICA’s strengths and weaknesses ...40
5.2.3 Coop’s strengths and weaknesses ...41
5.2.4 Bikupan’s strengths and weaknesses ...41
5.3 Strategic positioning...44
5.3.1 ICA ...44
5.3.3 Bikupan ...45
6.1 Suggestions for further research...48
Figure 2-‐1 Porter’s Five Forces (Porter, 2008)... 7
Figure 2-‐2 The Four Elements of a Competitor Analysis (Porter, 1980)... 12
Figure 2-‐4 Porter’s Generic Strategies (Porter, 1998) ... 15
Figure 5-‐1 Cross Case Analysis: SWOT... 43
Figure 5-‐2 Strategic Positioning of the analysed companies... 44
TablesChart 3-‐1 Overview of interviews ... 22
Chart 3-‐2 Reasons for choosing the specific cases... 23
Chart 3-‐3 Seven steps process (Marshall & Rossman, 2006) for analysing research methods... 25
Chart 4-‐1 Overview of organic food at selected retailers/stores (based on KRAV’s marknadsrapport 2012 and interviews (Appendix))... 31
Chart 5-‐1 Overview of Porter’s Five Forces applied in the Analysis... 39
Chart 5-‐2 Cross Case Analysis: Generic Strategies ... 47
AppendixAppendix 1: The Swedish organic food market (2004 – 2020)... 57
Appendix 2: Price comparision between ICA Maxi and Coop Forum in Jönköping... 58
Appendix 3: Interview guide... 59
Appendix 4: Interview with Bikupan... 60
Appendix 5: Interview with Coop Forum Sisjön (Green Room) ... 64
Appendix 6: Interview with ICA ... 67
Appendix 7: Interview with Coop... 70
In this Introduction chapter, we will present the background and problem on which the purpose and research questions of our thesis are built. A short section about delimitations in this paper and a definition finish the chapter.
The sales of organic food in Sweden are setting new records. In 2010, sales of or-‐ ganic food and non-‐alcoholic beverages rose by six per cent compared to the fig-‐ ures from 2009 (Statistics Sweden, 2011). This figure was almost doubled in 2011, when the sales of organic food rose by eleven per cent to a total of 9.2 billion SEK (Ekoweb, 2012). That implies that the organic food segment takes an ever-‐ increasing share of the food sales in Sweden. According to Ekoweb (2012), today’s turnover of 9.2 billion SEK will be almost doubled in just eight years, with the food retailing industry being the one with the highest potential. The increasing business with organic food is illustrated in Appendix 1.
One of the main factors behind this trend is that consumers have become more concerned about environmental, fair trade and health issues (Magnusson et al., 2001; Hughner et al., 2007). KRAV (see definitions, 1.6.2) found that consumers’ willingness to buy organic food has been increasing steadily (KRAV, 2012). One of the obstacles for buying organic food is high prices. The prices for organic food have decreased considerably during the last years (Magnusson et al., 2001; ICA 2011). This is due to the fact that Swedish retailers keep on introducing new or-‐ ganic food articles to the market, both national and private brands, and at the same lowering the prices of some of the products (see Table 1-‐2; ICA, 2012; KF, 2011). A private brand is a retailer’s own brand that helps it to differentiate itself from its competitors (Levy & Weitz, 2009).
In order to win more customers for the organic food segment, several Swedish re-‐ tailers introduced new private brands such as ICA’s “I love eco” or Coop’s “Ängla-‐ mark”(ICA, 2011; KF, 2011). The advantage with these private brands is that the retailers can offer organically produced food at a lower price and at the same time having more control over the market and products. Furthermore, it enables them to more easily reach the consumer, by having no entry barriers (Hultman et al., 2008; ICA, 2011).
One of the main advantages by having private brands is the potential to gain higher margins in contrast to the sales of national brands. Private brands also help retail-‐ ers to differentiate from others (Gullstrand & Jörgensen, 2011). Hultman et al. (2008) predict that there still is a lot of potential for private brands in the Swedish market and thus underlined their importance for competition among the players in the Swedish organic food market.
In the following section we will take a closer look at the Swedish food retail mar-‐ ket, before we introduce the organic food segment of the market in more detail. The Swedish food retail market is highly concentrated, meaning that only a few firms account for a large share of the market. Swedish food retailing chain ICA makes up 49 per cent of the Swedish market alone. Together with the other two
big players, Coop (20%) and Axfood (16%), 86 per cent of the Swedish market is covered. By including the small chains (Bergendahls, Netto, Lidl), almost the entire market, 98 per cent, is covered (Gullstrand & Jörgensen, 2011).
The trend in Sweden is towards larger but fewer grocery stores. Larger stores tend to have lower prices than smaller ones which is one of the reasons for this trend (Gullstrand & Jörgensen, 2011). Thus, small stores often need to differentiate themselves well in order to survive. However, Gullstrand and Jörgensen (2011) found that competition among Swedish food stores is local, implying that consum-‐ ers’ primary grocery store is closely located to their homes. Therefore, competition differs from region to region, and city to city in Sweden. A good example is Coop Forum Sisjön’s concept “Green Room”, which is an organic store in the main gro-‐ cery store, that would not be successful in other regions in Sweden, due to a lack of demand and less affluent consumers. We will introduce the concept in more detail in our case study about Coop.
When it comes to the sales of organic food, the market looks somewhat different. ICA’s, Coop’s and Axfood’s market share of the Swedish organic food market is not as high as in the Swedish food retail market. Together they stand for around 50 per cent (KRAV, 2012; Ekoweb, 2012).
Besides the traditional organic food retailers and stores, an increasing number of online stores open that sell organic food on the Swedish market.
However, in this thesis we will focus on the two biggest players in the Swedish or-‐ ganic food market: Coop and ICA, and will not go into more detail concerning or-‐ ganic online stores. Even though Axfood sells a higher number of organic food pro-‐ ducts than ICA (Chart 1-‐1), we decided to focus on ICA instead, since they are the market leader in organic food sales (turnover) and total food sales. Furthermore, we will have a closer look at how a small and local organic store, Bikupan in Jönköping, competes on the market. This is linked to Gullstrand’s and Jörgensen’s (2011) finding that Swedish food retailers compete on a local level rather than on a national one.
The Swedish organic food market is expected to grow in a similar pace in the com-‐ ing years as it used to in previous ones (Appendix 1). This attracts competitors, and makes existing ones to invest more resources in the field.
One of the indicators for an increasing competition within organic food is the fact that ICA decreased prices for its private brand last year to reach an even bigger customer group (ICA, 2011). Additionally, the increasing number of Coop’s and ICA’s assortment and variety (defined under 2.1.5) of their private organic food brands could be an indicator that competition is shifting towards price. This is partly based on Zanoli’s and Naspetti’s (2002) findings that many Swedish con-‐ sumers perceive organic food products to be too expensive and thus price is the main barrier for many consumers to buy organic food. At the same time, Coop is aiming to increase the share of organic food of total food sales to ten per cent in 2012 (KF, 2012) and might thus strengthen its position as the retailer with the largest assortment and variety (defined under 2.1.5).
Increasing competition among the market leaders as well as the trend towards lar-‐ ger but fewer grocery stores (Gullstrand & Jörgensen, 2011) puts also pressure on small and local organic food stores such as Bikupan. Therefore, new ways to differ-‐ entiate or to exploit a niche have to be found in order to be successful. Further-‐ more, a competitor’s current positioning strategy is crucial to know for a company in order to plan competitive actions. Consequently, a company needs to be aware of its capabilities, as well as opportunities and threats in the Swedish organic food market. This implies that a company needs to know who their competitors are, how they compete, as well as how it should act in response to their actions and the company’s own goals.
The purpose of this paper is to analyse the Swedish organic food market in terms of competition and business-‐level strategy.
1. How does competition look like in the Swedish organic food market?
2. What are the capabilities of Coop, ICA and Bikupan and how can they ben-‐ efit from external market developments?
3. What kind of generic strategy is being pursued by ICA, Coop and Bikupan in order to compete successfully in the market?
This thesis is written in the firm’s point of view and thus helps managers to better know about competition and firm strategy in the Swedish organic food market.
1.6.1 Organic food
In this thesis we focus on organic food retailers and stores. We are aware of the fact that there are other organic products sold in grocery stores, such as organic detergents or soaps. We refer to these other organic categories several times. Nevertheless, we found that it is less confusing when we only focus on organic food. The reason for that is that the research is divided in organic food and organic products. We decided to focus on organic food because it has the largest share of the assortment and variety of organic food products in ICA, Coop and Bikupan. Organic food is produced according to certain criteria that support sustainability and to keep the ecological system in balance. For example, pesticides, antibiotics, growth hormones or the use of genetically modified food is not allowed (Honkanen et al., 2006).
KRAV is a Swedish organisation that develops organic standards. The organic food products that comply with these standards are allowed to carry the KRAV label (KRAV, 2012).
With regard to epistemology which deals with the creation and construct of know-‐ ledge (Mathison, 2011), we believe that the reality is a social and subjective con-‐ struction and not a construct that can be objectively created. This means that any type of knowledge is rested upon personal experiences which are influenced by our social attitudes. With this perception in mind, we take our readers through an interpretative and qualitative approach.
We have applied an interpretative approach, since we believe it is the most suit-‐ able approach for our study, for three reasons:
Firstly, interpretation has a crucial role for this thesis, since it emphasizes the per-‐ sonal involvement in the data gathering process.
Secondly, interpretation does not want to delineate clear relations between statis-‐ tical analysis and objective facts. It rather attempts to understand the reality through a more sensitive process (Carson et al., 2001).
Thirdly, interpretation often takes a qualitative approach (May, 2002). The qualita-‐ tive approach can be comprised of different methods, such as for example in-‐depth interviews or focused groups (Carson et al., 2001). We will explain the qualitative approach that we are going to apply in our thesis in more detail in our method chapter.
Frame of References
In the frame of references we will present theories and research which has been done previously and which will be applied during our analysis. We will mention re-‐ tailing theory but our main focus will be on competition and strategy theory since this is of most usefulness, considering our purpose. Of special importance for our paper is the work done by Michael Porter who is according to Bailey (2007, p. 48) “a world authority on strategy and competitive advantage”. In order to analyse competition we will use his Five Forces Model. Furthermore, Porter’s three generic strategies will be applied with regard to Coop’s, ICA’s and Bikupan’s positioning strategies in the Swedish organic food market. In addition to Porter’s theories we will also use a SWOT analysis to determine the strengths and weaknesses of the chosen companies and analyse their fit with the external environment. We will not make use of a PESTEL because of the limited scope of this thesis.
There are several different channels retailers can use to sell their merchandise or service to customers. The most common one is the store channel, which does ac-‐ cording to Brynjolfsson et al. (2009) still vastly outsell other channels in most pro-‐ duct categories. The store channel offers a variety of benefits, that other channels do not offer. Many shoppers do not know the exact item they want but rather have a general idea about their wants. In a store they can browse the store and see what is available before they decide what to buy. Furthermore, it is possible to touch and feel products, get personal service by sales associates and decide whether to pay in cash or by credit. The physical presence of a store also limits the perceived risk for customers since they are less worried about the possibilities of returning an article (Levy & Weitz, 2009).
Today, the internet has become an important channel over which companies sell their goods and services to consumers. In Sweden 53 per cent of the population bought something over the internet during the last 3 months prior to a survey by the European Commission (Eurostat, 2012) and the tendency is that this will grow even further. Buying over the Internet offers the convenience that it can be done from home. Furthermore, Internet channels often offer a wide variety and informa-‐ tion that can help consumers during the buying process and retailers are able to personalize their offers for the customer (Levy & Weitz, 2009). Nonetheless, ac-‐ cording to Brynjolfsson et al. (2009), the internet channel is mostly used for selling specialized and niche products but struggles to compete with brick-‐and-‐mortar companies when selling mainstream products.
Besides those channels, there are other channels retailers can use to sell their pro-‐ ducts such as personal selling, vending machine, catalogues or kiosks (Levy & Weitz, 2009).
Today, many companies do no longer only use one retail channel but use instead multichannel retailing which is a combination of two or more channels (Levy & Weitz, 2009). According to Schramm-‐Klein & Morschett (2006), different channels can offer different advantages to customers and therefore, the total benefit for cus-‐
tomers can be larger, especially, when the different channels are well integrated in the multi-‐channel system.
There are several types of retailers operating through store channels. Most con-‐ sumers buy their food in conventional supermarkets even though other types of retailers are becoming more common. Conventional supermarkets are self-‐service food stores which offer all different kinds of groceries and some limited non-‐food items such as beauty products and general merchandise. Hypermarkets are an-‐ other type of retail store which are characterised by being very large and offering a broader variety than conventional supermarkets. Their product assortment con-‐ sists usually of 60-‐70 per cent of food but also of general merchandise such as hardware, appliances, electronics and furniture (Levy & Weitz, 2009).
Finally, there are speciality stores, selling organic products to customers. Speciality stores are relatively small and serve only a specific market segment by offering a limited number of merchandise categories and usually offering a high level of ser-‐ vice (Levy & Weitz, 2009).
Porter’s Five Forces
According to Porter (1980), five competitive forces shape competition within an industry. These forces are: Bargaining Power of Buyers, Bargaining Power of Sup-‐ pliers, Intensity of Rivalry, Threat of New Entrants and Threat of Substitute Pro-‐ ducts (Fig. 2-‐1). Porter’s five forces have an impact on costs, prices, as well as re-‐ quired investments of the firms in an industry, and therefore condition industry profitability.
However, Miller (1992), found some additional fields of “uncertainty” that charac-‐ terize an industry. Especially one field is stressed out by Miller to be of importance when analysing an industry. This is the one of “unexpected changes in the demand for the goods or services” that a firm is producing. Such an unexpected change can reshape an industry. “Technological uncertainty” is a further important field to be aware of when analysing an industry, since a firm is uncertain about when its competitors will introduce an innovation to the market. One should be aware of that an innovation can lead to a change in the competitive landscape. This “uncer-‐ tainty” is closely linked to Porter’s force “Rivalry among existing firms” (Miller, 1992).
The German discount supermarket chains ALDI and LIDL found many innovative ways to save money which had a noticeable impact on the food retailing industry and created uncertainties among their competitors. One of this innovations is to leave many of the articles they sell in cartoons rather than placing them on a shelf with the latter taking more time and being more costly. Furthermore, they have a limited assortment which helps them to save space and service costs.
Miller’s (1992) findings are closely connected to Achrol and Stern’s (1988), who stress the point that interdependence among competitors in an industry raises the level of decision uncertainty. This interdependence can be in the form of a shared
customer group, such as consumers who buy organic food but who do not care much about the retail store where they buy it.
Figure 2-‐1 Porter’s Five Forces (Porter, 2008)
Depending on the industry and its structure, the strength of the five forces can be stronger or weaker. In most of the industries, only a few of these forces are of im-‐ portance when analysing the industry competition. Stonehouse and Snowdon (2007) criticise the fact that Porter implies that the five forces fit equally well to all the firms within an industry. The strength of a specific force depends much more on each individual firm within an industry, rather than the industry overall. This difference might be, among other things, due to differences in firm size (Stone-‐ house & Snowdon, 2007).
Overall, the Five Forces Model helps firms to figure out the most crucial features of the industry structure in order to be profitable in the long-‐run (Porter, 1998). On the contrary, Rumelt (1991) points out that an industry has less impact on a firm’s profitability than firm-‐specific factors do.
2.2.1 Threat of New Entrants
The threat of new entrants relies upon the existing entry barriers in an industry, as well as the reactions which are expected from existing companies in that industry in case of a newcomer. Besides high barriers of entry, strong expected retaliation leads to a low threat of entry. The following barriers to entry are the main ones ac-‐ cording to Porter. However, one should keep in mind that entry barriers can change (Porter, 1980).
-‐ Economies of Scale -‐ Product Differentiation -‐ Capital Requirements -‐ Switching Costs
-‐ Access to Distribution Channels
-‐ Cost Disadvantages Independent of Scale (brand identification, competitors’ experience and networks in the industry etc.)
Porter points out several ways to overcome entry barriers cheaper than competi-‐ tors do. When a firm comes up with an innovative and differentiated product or service, it can direct attention to itself and thus overcome differentiation barriers (Porter, 1980). Low-‐cost airline Ryanair was able to offer lower-‐priced tickets than its competitors and thus overcame entry barriers to the highly competitive airline industry. This was achieved by, among other things, flying to smaller air-‐ ports located further away from major destinations than the big airports. Ryanair found a niche in the market which is another way to overcome entry barriers.
By developing a new way to market the firm’s product or service, such like having offensive marketing campaigns that make people talk about your brand, is a fur-‐ ther suggestion for how to overcome entry barriers (Porter, 1980).
The importance of finding ways to overcome entry barriers is mirrored in Lippman and Rumelt’s (1982) findings, who state that it is difficult for a firm to copy a com-‐ petitor’s successful strategy. This holds even true for a firm that has total transpar-‐ ency of a competitor’s strategy.
In order for a firm to find out about the reaction of existing firms in an industry, it can pay attention to four characteristics (Porter, 1980). If existing firms have an-‐ swered new entrants with strong retaliating actions, such as price cuts or exten-‐ sive marketing campaigns, a firm can be sure about that it would not be different in the case of that firm entering the industry. Second, the level of resources available to retaliate a newcomer’s entry is a further characteristic that a firm should be aware of. This can be in the form of savings or other unused resources such as power over suppliers. The level of retaliation will also be higher, the more import-‐ ant that industry is for the incumbents. The fourth characteristic is that of slow in-‐ dustry growth which implies that an entrant cannot grow without decreasing its competitors’ market share (Porter, 1980).
2.2.2 Rivalry among existing competitors
Firms in an industry are usually dependent on each other, which implies that ri-‐ valry occurs when, for example, one or several of these firms try to gain a bigger market share. Depending on what the firms are competing on (price, advertising etc.), the industry might be better or worse off. There are numerous indicators in an industry that can give an idea about how intense rivalry is among the firms in that industry, such as slow industry growth, shift in rivalry, lack of differentiation, high strategic stakes or high exit barriers. For example, when the competing firms in an industry are relatively equal in terms of their size, it might lead to a more in-‐ tense fight for market dominance, since they have similar levels of resources avail-‐ able for action and reaction (Porter, 1980).
In order to understand the level of rivalry among firms in an industry, one should also look at the dimension on which competition is based. One dimension can be price, which can have a severe impact on the profitability of an industry. Price re-‐ ductions by one competitor often lead to retaliation actions by the others and thus can start a price war. Customers tend to focus more on the price of the products and less on its features and services when competition is based on price. Competi-‐ tion based on price often occurs when the products are perishable (Porter, 1980; Porter 2008). Before retailers end up throwing away milk products that expire soon, they try to sell them for a reduced price to capture some of the value.
Another indicator that competition is likely to be based on price is when the pro-‐ ducts or services being sold by competitors are very similar to each other. Many grocery retailers sell the same food brands to almost identical prices which en-‐ courage some of them to cut prices to win new customers (Porter, 1980; Porter 2008).
On the other hand, competition that is rather based on dimensions like the level of service or product features such as “locally produced” does normally not have the same negative impact on profitability. This is because these dimensions justify a retailer to charge higher prices and at the same time, customers get more value in return. Therefore, these dimensions can be used to create entry barriers against newcomers and substitute products. A situation where many rivals compete on the same dimensions and target the same customers, zero-‐sum competition can be the result. This means that profitability is decreasing and that all the competitors are worse off. Consequently, positive-‐sum competition is much more likely to occur when every competitor within an industry targets a specific customer group and specific needs in the market (Porter, 1980; Porter, 2008).
Chen (1996) points out that the relationship between pairs of firms should be re-‐ garded when analysing industry competition, rather than all of a firm’s competi-‐ tors or groups of firms at the same time. This is due to the fact that there are dif-‐ ferences within the market, meaning that some competitors are more similar to a firm and thus a bigger rival.
2.2.3 Bargaining Power of Buyers
Buyers try to reap the biggest benefits from the goods and services they buy. This can be for example in the form of price reductions or better service conditions. Consequently, industry profitability can be significantly reduced depending on the level of the bargaining power of buyers (Porter, 1980).
Several conditions signify whether the bargaining power of buyers is weak or in-‐ tense. For example, if a large portion of a supplier’s sales go to one retailer, the chances are high that this retailer possesses bargaining power. One mean to de-‐ crease bargaining power of buyers is by increasing the service and thus raising the buyers’ switching costs (Porter, 1980; Porter, 2008).
Grundy (2006) argues that there are a lot of interdependencies between Porter’s five forces that one should be aware of. One of these interdependencies is between bargaining power of buyers and threat of new entrants. Buyers can have the power to spur new companies to enter an industry and hence decrease entry barriers (Grundy, 2006).
2.2.4 Bargaining Power of Suppliers
The threat of rising prices and/or the reduction of the quality of the products a supplier leverages to its buyers, are means to gain bargaining power over firms in an industry. Just like under a condition where there is bargaining power of buyers, suppliers’ power can lead to a severe reduction of industry profitability. A situation where there are only a few suppliers and a more disconnected buyer group, raises the bargaining power of that supplier group. In addition to that, the importance of the supplier’s product for the buyer should be regarded. The more important it is, the more vulnerable the buyer is to actions benefiting the suppliers (Porter, 1980).
Of significant importance is the threat of forward integration into the buyer’s mar-‐ ket (Porter, 1980). According to Levy and Weitz (2009, p.7), “forward integration occurs when a manufacturer undertakes retailing activities”. Chocolate and confec-‐ tionary producer Lindt is one of those producers who integrated forward into its buyers’ business by opening small stores where exclusively Lindt chocolate and confectionary is being sold.
On the other hand, backward integration occurs when a retailer enters the market of its suppliers and manufacturers (Levy & Weitz, 2009).
2.2.5 Threat of Substitute Products
Substitute products are those that are similar to the ones produced within an in-‐ dustry. The breadth and depth of the merchandise offered by retailers are of im-‐ portance when identifying substitute products. The breadth of merchandise, also known as variety, is the amount of merchandise categories that are covered in a re-‐ tailer’s offering. Assortment on the other hand, is the synonym for the depth of merchandise, and refers to the aggregate of different articles within a specific mer-‐ chandise category (Levy & Weitz, 2009).Especially the depth of the merchandise might be deeper in certain merchandise categories. For instance, the assortment of
conventional pasta sauces in Swedish retail stores is deeper than the one of or-‐ ganically produced pasta sauces.
Substitute products can decrease the price level that firms in an industry have as their target. The more similar a substitute product is to a firm’s product, the less freedom that firm has to alter the price setting as it wishes. A mean to decrease the threat of substitutes is by adding new features and value to the product or service being offered (Porter, 1980). Well-‐educated employees that have extensive pro-‐ duct knowledge, such as in a speciality store, is an example for good service. Pri-‐ vate brands, a firm’s own brand, are another way to decease the threat of substi-‐ tutes. This is due to the fact that these private brands create uniqueness for a re-‐ tailer as well as store loyalty among its customers (Levy & Weitz, 2009).
Moreover, firms should always pay attention to changes in other industries that have some relatedness to their own. This is due to the fact that technological im-‐ provements or changes in customer preferences can lead to the fact that an in-‐ dustry’s products can suddenly become a substitute for the ones of another in-‐ dustry (Porter, 1980; Porter, 2008).
However, the identification of a firm’s product’s substitutes is not that easy, due to the fact that there are direct and indirect substitutes. For example, a supplier’s ser-‐ vice sold to a retailer is threatened when the retailer is acquired by another com-‐ pany with an already existing supplier of that service (Porter, 1998). One does not immediately think of milk to be a substitute to Coca Cola. Nevertheless, both are beverages and the sales of Coca Cola can be negatively affected by a large market-‐ ing campaign that highlights the healthy ingredients of milk against the unhealthy ones of soft drinks. Porter (1980) identified three characteristics that make up the function of the threat of substitution. These are first, the costs that occur when switching to a substitute, second, the tendency of the buyer to buy the substitute product and third, the difference in value and price between a substitute and the current product.
Based on the knowledge about these five forces, a firm better knows in which areas it can make use of its core competencies and compete against its rivals as well as in which areas it should avoid competitive actions (Porter, 1980). This goes in line with Hatten’s and Hatten’s findings (1987), who point out that a successfully im-‐ plemented strategy of firm A might not work for firm B due to differences of firm B’s resource capabilities. However, the analysis of the five forces should be linked to factors outside of an industry, such as legal and economic factors, in order for a firm to get a better picture of the competitive landscape in which the industry is embedded (Grundy, 2006). When regarding these factors, and understanding the five forces that shape its industry, a firm can successfully reshape the industry structure.
The Components of a Competitor Analysis
The reason why a competitor analysis is of importance is due to the fact, that it gives a better idea about the likelihood of a competitor’s possible strategic moves and reactions, based on changes in the competitive industry environment. A com-‐
petitor analysis can help a firm, among other things, to more easily figure out what a certain strategic move of a competitor implies for its own strategy, which area and/or competitors it should tailor its strategic moves for, and which competi-‐ tor(s) it should avoid to attack. At the same time, a firm can use this framework for self-‐assessment (Porter, 1980).
Figure 2-‐2 The Four Elements of a Competitor Analysis (Porter, 1980)
Figure 2-‐2 shows the four elements of a competitor analysis, namely the current strategy, capabilities, assumptions and future goals. Having analysed these four elements, a firm will better understand, how a competitor might respond and act now, as well as in the future (Porter, 1980).
A competitor’s future goals give an idea about the likelihood of a change in its strategy and the level of retaliation, given a strategic action taken by one of its competitors. This is because future goals can predict whether a firm is satisfied or not with its current situation and results and in what market position it wants to see itself in the future. In order to avoid strong competitive actions and reactions due to a new market entrant, a firm may investigate if there is a position in the market that does not directly threaten its competitors (Porter, 1980).
Assumptions about a competitor can be drawn by looking at facts like its values, beliefs about its market position or its history. For example, a firm may look at one of its competitor’s areas in which that competitor has been successful, and may thus be able to assume what that competitor is going to do next (Porter, 1980).
A competitor’s capabilities show its strengths and weaknesses and thus the level of power to act and respond. These capabilities help a firm to determine whether a competitor is able to adapt to a new entrant’s way of doing business. This way of doing business can be related to many aspects, like for example cost, service, pro-‐ duct or marketing. In addition to that, the level of a competitor’s financial strength is a further characteristic worth investigating. It can give a firm a good picture about how the rival will act in terms of fierce competition and retaliating actions (Porter, 1980).
Based on the results of the analysis of these four elements, a firm can create a competitor’s response profile (Porter, 1980). Chen et. al. (1992) did some further research on how competitive actions impact firm rivalry, which builds on Porter’s findings related to the five forces and a competitor’s response profile. The time lag between a competitor’s move and its competitors’ responses was investigated. Chen et al. (1992) found that it depends whether a competitor’s move is strategic or tactical. Strategic actions require more firm resources and have a greater impact on the business than tactical actions. The latter leads to more responses by com-‐ petitors in a shorter period of time. Strategic actions on the other hand can reduce the number of competitive responses and can take the competitors a longer time to respond. This is due to the fact that it takes more time to implement a strategic ac-‐ tion in comparison to a tactical one (Chen et al., 1992).
Market commonality and resource similarity are two more measures that are of importance when doing a competitor analysis. Both of them are closely linked to Porter’s five forces (Fig. 2-‐1) and Porter’s four sources of a competitor analysis (Fig. 2-‐2). Market commonality, is a measure about the number of markets in which a firm and a rival are competing in, as well as the importance of the markets to each of them. Sweden’s food retailers ICA and Coop for example compete in sev-‐ eral markets, such as in Sweden and Norway, groceries and home ware. Resource similarity is the degree to which two firms’ resources are similar to each other in both type and number of resources (Chen, 1996). This can be for example in the form of the similarities between two retailers’ suppliers like Arla or Axa that both supply Coop and ICA with organic food products among other things.
The SWOT analysis is a tool to analyse the broader environment of an organization. According to Dyson (2004),the SWOT analysis combines internal and external fac-‐ tors and is useful for analysing the fit between an organization’s capabilities and its external environment. Furthermore, it is, according to Mintzberg et al. (1998), a powerful tool in the strategy development process. Therefore, we will use it to ana-‐ lyse and develop a strategy for our cases.
SWOT stands for strengths, weaknesses, opportunities and threats. It includes the internal capabilities of an organization in terms of strengths and weaknesses, as well as the external business environment in terms of opportunities and threats (Fleisher & Bensoussan, 2003). According to Fleisher and Bensoussan (2003), strengths are those capabilities and resources which help an organization to be