Answer :

HOW THE EXTERNAL ENVIRONMENT HAS INFLUENCED INNOVATION IN THE RETAIL FOOD INDUSTRY

Introduction:

The food industry is not a small industry, and it has different segments. To conduct this assignment, food retailing segment is selected. The present market is very much competitive, and the organisation which sells the same type of product faces huge competition, so it is important to have some product innovation. Innovation helps to improve the effective of productivity. The present worth of the grocery market in the UK is £179.1 billion with an increment of .6% than the year of 2015 (Retaileconomics.co.uk, 2016). It is seen that the grocery market in the UK accounts for the 50.2p in every £1. It is estimated that in the year of 2021, the worth of the UK grocery market will be £196.9 billion (Retaileconomics.co.uk, 2016). In this huge grocery market, Tesco has been the top performer with more than 28% market share in the UK grocery and food retailing market. However, it is important to note that ASDA (a division of Wlamart) is also a pertinent competitor in the UK food retailing market. It is noteworthy that Walmart USA is the largest food retailer in USA and is rapidly expanding all over the world. 

Impact of external environment in driving innovation in the food retailing industry:

Tesco and Walmart comparison in the food retailing industry: 

The present trend of the market is excepting the products and services that can help people to maintain their health and well-being. It is seen that the present food retailing segment of the UK have different segments such as hypermarket, supermarket, online market, convenience, discounted store and so on. Along with them, most of the sales are encountered from the supermarkets, among the total £179.1 billion sales, £86.6 billion sales were encountered from the supermarkets (Thegrocer.co.uk, 2016). In the UK food retailing sector, the average weekly sales on the first month of 2016 were £2297 million where the average weekly sales for small food retailers are the £372 million. Therefore, it can be easily estimated that the food sector of the UK is very high. Among the established retailers from the UK, Tesco is the largest food and beverages retailer in the UK. Tesco is one of the British multinational food and general merchandise who ranked third in the world. The market share of the Tesco in the UK retail sector is the 28.4% (Essentialretail.com, 2016). The current revenue of Tesco is £54.433 billion and they have achieved this with 476000 numbers of employees. Tesco has several business segments such as hypermarket, supermarket and the superstore (Destination-innovation.com, 2016).  Wal-Mart is also not different from it. ASDA is working as a division of Wal-Mart in UK though Wal-Mart is the most successful retailer in US as well as the globe with more than 30% market share in the global retailing market. 

Application of Porter’s five forces in Tesco: 

Figure 1: Porter’s five forces for Tesco

(Source: Miller and Friesen, 2015, p.256)

Market rivalry: According to Adi (2015), market rivalry increases due to the presence of competent players in a given market. The food retailing market of the UK is highly segmented, and there are several established market player such as Morrison, ASDA (A division of Walmart), LIDL and Marks and Spenser. However, the closest rival is Morrison and ASDA who are increasing their market share and presence in the UK market (Miller and Friesen, 2015). The main reason behind the high intensity of competitive rivalry is slow to market growth, a huge number of established market players and low switching costs. It is seen that in the recent times, Asda only achieved .2% increment from the 16.6% increase. On the other hand, Sainsbury has achieved .3% increase in their market share from 15.8% that threatens the leading position of the Tesco in the UK market (Thegrocer.co.uk, 2016).

Threat of new entrants:  In the case of the food retailing market, the substitute of the major food retailers such as Tesco can be several small convenience stores, different organic shop and the licensed shop (Foodsecurity.ac.uk, 2016). However, according to Moreno-Izquierdo et al. (2016), considering the place and distribution factor in consumer decision making process, small convenience stores can be highly competitive for Tesco as consumers feels it safe and convenient to buy from local stores rather than from supermarkets.  Therefore, the small convenient stores can also be a threat for Tesco in the UK market. 

Threat of substitutes: It is seen that the threat of substitutes in the grocery retailing market of the UK is very low for the food items because there are not any substitutes for food related items (Godfray et al. 2010). It is also a matter of fact that there is no real substitute for a product.  

Bargaining power of consumers: According to Dey (2016), bargaining power of consumers increases when market rivalry is high. However, it is also notable that due to low substitute threat, consumer bargaining power may decrease. As far as UK food retailing market is concerned, consumer bargaining power is moderate as they can change their brand preference, but cannot change the food items as there is no specific substitute for food items. 

Bargaining power of suppliers: In the case of food retailing organisation, the organization has more power than the farmers or suppliers because they are huge in numbers.  The suppliers are supplying packaged food items as well as fresh foods that are being sold in the retail stores in Tesco. As per the news from  Telegraph.co.uk  (2016), the relationship between suppliers and Tesco is not quite okay. In the last one year, Tesco has delayed payments, misbehaved with suppliers whereas forcing the suppliers to repay their bills for any possible underpayment. It shows that Tesco has the real bargaining power over its suppliers. 

Therefore, to achieve huge market growth and maintain the market leadership strategy, it is important for the Tesco to facilitate innovation in the market. It is seen that there are several foods retailing organisation such as Waitrose, ASDA (division of Wal-Mart), Wal-Mart who are stealing the market share of Tesco so they are determined to implement the innovative strategy so they can achieve huge market share (Food security.ac.uk, 2016). Along with the business process innovation, Tesco also facilitates innovation in the technology. The information technology departments of the Tesco are well capable of adopting any technological advancement very easily. They have developed several apps and services such as IFTTT, BYOD, and mobile payments app for their customers as well as employees (Theconversation.com, 2016).

Application of Porters five forces in Walmart: 

The porter’s five forces model of the Wal-Mart is as follows:

Figure 2: Porters five forces for Walmart

(Source: E. Dobbs, 2014, p.214)

Market rivalry: Intensity of the competitive rivalry is high in both the UK market and the global market because of the presence of huge retail organization. In the US market there are several established market players such as Amazon, Coulomb technologies, Target, Best buy etc (Morningstar.com, 2016). 

Figure 3: Market share of Wal-Mart and their competitors

(Source: Trackmaven.com, 2016)

All of those organizations follow an aggressive marketing strategy by which they can attract their customers. Along with different US based retail organization, Wal-Mart is also facing competition from different international organization such as ASDA, Tesco, and Sainsbury. 

Threat of new entrants: In the retail business the initial set up costs and moderate cost to develop brand creates threat for new entered organization so they are facing less amount of threat from new entered organization. 

Threat of substitute: Substitute for airline travel can be boat or railway travelling. However, for food items, the threat of substitute is quite less (E. Dobbs, 2014).  Therefore, Wlamart has a good chance to gain growth in the US food retailing as well as global food retailing market. 

Bargaining power of consumers: There are different established market player in the market and the switching cost is less so bargaining power of the customers is high. When they starts their operation in the international market they also faces competition from different established player in the foreign market so it is very difficult for them to attract the customers from the international market. In this context, due to the high competition and non availability of substitutes of food product, bargaining power of consumers is low in this market. 

Bargaining power of suppliers: In order to maintain their low pricing strategy Wal-Mart provides the lowest possible price to their suppliers. They paid a total of USD 13.5 billion in 2015 to their suppliers (Spieckermanretail.com, 2016). However, it is important to note that unlike Tesco, Walmart has good supplier relation. Therefore, the bargaining power for suppliers is moderate whereas the real bargaining power is in the hands of Walmart. 

Therefore, it is clear from the above discussion that the external factor analysis can be helpful for any organisation to facilitate the innovation because it helps the organisation to understand their current position in the market. The current customers are very much health conscious and want to consume only healthy foods so to facilitate innovation it is important to fill their store with healthy foods (Miller et al. 2012). 

PESTLE analysis for Tesco: 

Table 1: PESTLE analysis for TESCO

(Source: Zalengera et al. 2014, p.272)

The food industry is highly affected by the politics of the region in which any company is operating. Therefore, Tesco is affected by different types of politics because they are operating in different continents. During operating in the UK, they are facing the current inflation that is created due to UK left the EU. On the other hand, they can face a problem when they are operating in the America. This is because in the current time Donald Trump has been selected as the Presidents, so there is huge possibility that he will change different tax imposes on any organisation (Tassou et al. 2014). On the other hand, in Chinese or Indian market Tesco have to charge low pricing strategy because in those areas the disposal income of the customers is very less (Rogers et al. 2013). Therefore, innovation is highly required for the Tesco to maintain their operation in different countries because the various countries have different economic and political condition so they have to invent their strategy accordingly so they can attract them. On the other hand, Tesco is one of the foods related organisations, so they need to follow different food security act. According to the food safety act of the UK, any organisation is liable to show all of the ingredients in the food (De Britoet al. 2014). On the food security Act of the Asia describe that every food related organisation are liable to provide quality food at a cheaper price. On the other hand, the food safety act of the US increases the productivity, improves markets and builds the local capacity (Dawson, 2011). Therefore, it is seen that in every organisation food safety act is different, so it is important for the organisation to maintain the food safety law of different countries when they start their operation in another country. Further, Tesco will need to innovate new technologies in order to ensure that minimum carbon emission occur whereas measures for preventing foods from decaying and  

PESTLE analysis for Walmart: 

(For table of PESTLE analysis of Walmart, refer to appendix 1)

It is observed that the organization Wal-Mart operates in a global basis thus the political factors greatly influence the organization’s performance. Wal-Mart is required to adopt are the taxes that it had to pay to the concerned government and the act of legislation that it had to follow. As Wal-Mart is an US based food retailer, the current political instability seen in UK as well as in USA might affect the business operations of the company (Avermaete et al. 2012). Coming to the economic condition of global consumers, after the 2008-09 economic recession, buying power of consumers has decreased dramatically. Now those consumers that intended to buy the high priced products went for less priced products or to other competitors that are providing low priced good quality products. It has driven innovation within the food retailing of Wal-Mart, especially in the ways Wal-Mart used to conduct its business activities. Focus is shifted from high priced products to innovative new products to gain competitive advantage from the customers.  However, increasing economic stability in the international market has been a growing concern for the company as only focusing on the US market for overall growth opportunities might not be effective for the company in gaining sustainable growth (Hernández-Espallardo et al. 2011). 

Focusing more in the international market along with innovative ideas might be effective for the company.  However, the company has also need to consider consumer preferences and choices. Due to the changes in the taste and preference of the customers in the US market the respected organization mostly focus on the non food items to be sold out in the market. Apart from that Tesco is taking up new strategies to adopt the changes that are wanted by the customers to increase its competitive advantage in the market. It is with the advancement in the technology there are several opportunities that are gained by the organization to upgrade its position in the market. The development in the online shopping platform helps the organization to gain rightful importance in the eyes of the customers. Due to the increase in the environmental issues the organization has made its contribution in reducing 50% carbon fruit prints. It has been claimed by the organization that by the year 2020 the organization would make a success in the reduction of the waste that is produced by the organization (Galizzi and Venturini, 2012). The organization is obliged to follow the legal rules and regulations. It has been observed that the organization is going to take up the new policy of food retailing commission, 2004. The organization would also put forward its steps in reducing the price of the product for the benefit of the customers in the market. Thus, the challenges, especially in terms of environmental protection and legal aspects have led the company to innovate new products and ways by which these challenges can be curbed. 

Conclusion:

The above discussion concludes the fact that to achieve the sustainability in the market; it is important for any organisation to facilitate the innovation in the market. Several external factors in the market can make any organisation more vulnerable. Therefore, in order reduce the impact of the external factors; Tesco should invent an effective strategy by which they can reduce the negative consequences of the external factors. It is also important to accept the positive impact of the external factors so they can achieve competitive advantage.

Appendices: 

Appendix 1: 

Table 1: PESTLE analysis for Walmart

(Source: team, 2013, p.289)