3.1 Political Factors:
Any environmental or government issues need to be addressed. Factors including monopolies legislation or environmental protection laws are important. The legislation stands that any of the supermarkets are not allowed to build on ‘brown belt’ land, as this is prohibited to protect the environment. Regarding this, thought also has to be given to where to new buildings are situated as noise, pollution, residential areas etc have to be considered. Foreign trade laws could affect the retailers in the near future as import and export laws could produce problems regarding purchasing stock and services internationally. Consideration given to employment laws enforces codes of practice within the industry. If the legislation is to change the firms will need to cohere to the modifications.
3.2 Economic Factors:
Rates of interests, tax and inflation are all vital influences. The amount of tax the company has to pay may restrict on other things and have a knock down effect on other areas of the company e.g. employment increases and pay rises. If the rate of inflation changes this could also affect the company. It could mean that suppliers increase their prices which in turn lead to increased buying costs. Unemployment rates and consumers disposable income have an existing role as the lower amount people have to spend will end in cheaper branded (no-frills) products being purchased leaving less profits for the company.
3.3 Socio-Cultural Factors:
Social factors influence people's choices and include the beliefs, values and attitudes of society. Such changes can impact purchasing behaviour. Consumer attitudes and beliefs lead to brand loyalty to a supermarket. Realising the change in consumers’ opinions will allow the company to make any needed changes. If the changes aren’t acknowledged the customers experiences could have a knock on effect for the company from their word of mouth. Added complications when looking at social and cultural factors are differences in ethnic and social groups. Not all groups have the same attitudes - and this impacts how they view products and services. Demographic changes also have a major role as these can affect the number of customers a supermarket receives each day. New builds need to consider where people are living regarding motorway links, local residential areas and how accessible the store is.
3.4 Technological Factors:
Advances in technology can have a major impact on business success. As well as advances in the supermarket industry, the likely impact of new technologies - the Internet, mobile phones, and the increasing advances in computing and computers will affect how businesses are run in the future. Taking advantage of any technology that could make producing their products easier and that could make the firms products obsolete will benefit any supermarket. Government spending on research could lead to a change as a result of study in fast-food, obesity, additives etc. This already has lead to change within businesses including new labeling policies.
4. Porter’s Five Forces Model:
The PESTEL analysis is of limited value unless accompanied by a detailed understanding and analysis of the factors involved and the interactions between these factors. This is where Porter’s Five Forces Model is applied. Worthington, Britton and Rees (2001) define the analysis to be the structure of an industry and the ability of firms to act strategically depend on the strengths of five forces:
4.1 Bargaining Power of Suppliers:
The structure of the industry can relate to the business if the firm can get the same supplies from elsewhere. This depends on how many suppliers there are to choose from. The suppliers in supermarket retailing are not monopolistic. As a result they may not be able to extract a high price from the retailers as they have the choice to go elsewhere. They may still hold their power if they are able to integrate forwards in order to obtain higher prices and margins. Also they are able to hold their position if it is difficult or costly for the supermarket to change. For example, it would not be ideal for a smaller supermarket such as Somerfield to negotiate suppliers, as they do not hold the buying power as that of e.g. Tesco, therefore they would not be able to demand a lower selling price. In turn the suppliers would be able to hold their bargaining power over the smaller chains.
4.2 Threat of Substitutes:
A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. Competition from substitutes limits the price that can be asked. Regarding supermarkets this applies to several goods they sell as there is more than likely to be more than one brand. For the likes of Asda, Sainsbury’s and Tesco, petrol is an exception as there is no substitute meaning demand is inelastic respective to price. Clark (2000) argues that the substitutability of a firms products’ are important insofar as having many substitutes increases elasticity of demand and thereby reduces the products profit potential. (Pg 129)
4.3 Bargaining Power of Buyers:
This refers to the ability of buyers to negotiate and bargain over purchase prices. Adapted from Perman & Scouller (2004). In respect to supermarkets purchasing from suppliers, a large chain such as Tesco are in a healthy financial position and are able to use their buying power to drive the suppliers costs down and in turn retain money to utilize in other ways.
4.4 Threat of New Entrants:
The competition in the supermarket industry will be higher, the easier it is for other businesses to enter the market. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry. These typically include:
- Economies of Scale
- High investments and fixed costs
- Brand loyalty of customers
- Legislation and Government interaction and intervention
- Expected Reaction of existing firms
- Access to distribution channels
(Adapted from Hornby, Gammie and Wall [2001, Pg 299])
4.4 Industry Competitors:
The force of competitive industry measures the intensity between existing organizations. The high competitive pressures results in pressure on prices and margins, in turn on profitability for every supermarket in the sector. The industry carries high exit barriers which lead to the persistence of excess capacity and hence leads to intense competition. All of the retailers are constantly battling with each other to increase their market shares.
5. Conclusion
The business environment consists of various external influences that affect its decisions and performance. Having identified these influences, consideration now has to be given to what the findings signify. Any supermarket considering expansion needs to consider various questions. Is the company in an overall strong competitive position? Can it continue to pursue its current business- or corporate-level strategy profitably? What can the company do to turn weaknesses into strengths and threats into opportunities? If the firm is able to generate the correct response to these questions then expansion within the industry is highly likely. To be successful the company needs to hold a sustainable competitive advantage over its competitors. This will help them to enable market survival. The recommendations are directed at solving whatever strategic problem the company is facing and at increasing its future profitability. To be in a strong position the firm needs to be able to withstand the full force of the treats from the business environment. They should be able to change their business-level strategy to counter them. For the Supermarkets who hold the top 5 market positions in the UK, they already hold a stable financial standing. The attractiveness of expansion for said companies is high as it will help to maintain their growth. It may not be straight forward as they have to consider the factors of the PEST analysis and also what corporate strategy their competitors are taking. The smaller chains such as Aldi, Netto and the Co-op will have to take more consideration as they do not dominate the market. More research time will have to be dedicated into what their opponents are doing. This will help to give them the edge.
Appendix 1
Checklist for a PESTEL analysis:
Mullins (2005) Pg 127
Bibliography
Clark, A. (2000) “Organisations, Competition and the Business Environment” Pearson Education Limited
Hornby, W., Gammie, B., Wall, S. (2001) “Business Economics (Second Edition)” Pearson Education Limited
Mullins, L.J. (2005) “Management and Organisational Behaviour (Seventh Edition)” Pearson Education Limited
Perman, P., Scouller, J. (2004) “Business Economics” Oxford University Press
Worthington, I., Britton, C., Rees, A. (2001) “Economics for Business – Blending Theory and Practice” Pearson Education