identified as Unilever, Dageo and Mondelez International. These ... not to break the ties to certain actors (i.e. Diageo, Unilever, Mondelez International, and the.
ASDA’s fight for market share In the UK’s supermarket industry
Dimosthenis Michalakeas (4414659) Evan Clearesta (4416252) Filipe Gomes (4407547) Rodrigo de Luiz-Garcia (4420616) Wouter Schoof (1336894) January, 23rd, 2015
ASDA’s fight for market share This report is written as if it was for ASDA, the UK supermarket. Because this report is part of the course work for the MSc. course EPA1143 Actors and Strategy Models the report is written a bit more academic then a true advisory report would’ve been. The information in this report is based on internet sources and some course books. It was beyond the scope of this report to interview employees, etc. We would like to thank our supervisor Mr. Hermans for his help and involvement during our project. Also we would like to thank Mr. de Reuver for his help concerning the issues and questions we encountered with respect to the Social Network Analysis and Mr. Cunningham for his help regarding the application of the Game Theory method. Evan, Dimosthenis, Felipe, Rodrigo, Wouter
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Table of Contents TABLE OF CONTENTS ............................................................................................................................ 3 1. INTRODUCTION ............................................................................................................................. 5 1.1 ASDA’S STAGNATING MARKET SHARE ................................................................................................... 5 1.2 GOAL OF REPORT ............................................................................................................................. 5 1.3 METHODOLOGY AND STRUCTURE ......................................................................................................... 6 2. IDENTIFICATION OF STAKEHOLDERS ............................................................................................... 7 3. SELECTION OF COST-CUTTING STRATEGY........................................................................................ 8 3.1 IDENTIFYING COST-CUTTING STRATEGIES ................................................................................................ 8 3.2 EXPLORING THE STRATEGIES ............................................................................................................... 8 3.3 CONFLICT ANALYSIS METHOD .............................................................................................................. 9 3.4 APPLICATION OF CONFLICT ANALYSIS .................................................................................................. 10 3.4.1 IDENTIFYING THE RELEVANT ISSUES AND STAKEHOLDERS ............................................................................... 10 3.4.2 UNDERSTANDING STAKEHOLDERS’ ACTIONS ................................................................................................ 10 3.4.3 BUILDING A FEASIBLE SET OF SCENARIOS .................................................................................................... 12 3.4.4 CLARIFYING STAKEHOLDERS’ PREFERENCES’ OVER ACTIONS............................................................................ 14 3.5 FINAL RESULTS AND INTERPRETATION .................................................................................................. 14 3.5.1 INTERPRETATION: REDUCING SUPPLIERS’ MARGINS ...................................................................................... 16 3.5.2 INTERPRETATION: REDUCING WAGES COSTS ................................................................................................ 16 3.6 CONCLUSION AND RECOMMENDATIONS .............................................................................................. 17 4. ASSESSING BUSINESS STRATEGIES OF GROWTH............................................................................ 18 4.1 IDENTIFYING SUITABLE STRATEGIES ..................................................................................................... 18 4.2 EVALUATING SUCCESSFUL STRATEGIES BY THEIR ESTIMATED PAYOFFS .......................................................... 18 4.3 GAME THEORY METHOD .................................................................................................................. 19 4.4 APPLICATION OF GAME THEORY ........................................................................................................ 19 4.4.1 PLAYERS OF THE GAME ............................................................................................................................ 19 4.4.2 POSSIBLE COUNTER STRATEGIES................................................................................................................ 20 4.4.3 PAYOFFS ............................................................................................................................................... 21 4.4.4 RULES AND BOUNDARIES OF THE GAME MODEL ........................................................................................... 21 4.4.5 GAME THEORY MODEL............................................................................................................................ 21 4.5 FINAL RESULTS AND INTERPRETATION .................................................................................................. 22 4.6 CONCLUSION AND RECOMMENDATIONS .............................................................................................. 23 5. EFFECTS OF STRATEGY ON ASDA’S SOCIAL NETWORK ................................................................... 24 5.1 EFFECTS OF STRATEGIES ................................................................................................................... 24 5.2 SOCIAL NETWORK ANALYSIS METHOD ................................................................................................. 24 5.3 APPLICATION OF SOCIAL NETWORK ANALYSIS ....................................................................................... 25 5.4 RESULTING SOCIAL NETWORKS AND INTERPRETATIONS ............................................................................ 25 5.4.1 THE GENERAL SOCIAL NETWORK ............................................................................................................... 25 5.4.2 EFFECTS OF PUTTING PRESSURE ON SUPPLIERS ............................................................................................ 27 5.4.3 EFFECTS OF INCREASING PRODUCT DIVERSITY .............................................................................................. 27 5.5 CONCLUSION AND RECOMMENDATIONS .............................................................................................. 28 6. REFLECTION ON METHODOLOGY: METHODS AND OUTCOMES...................................................... 30 6.1 REFLECTION ON GAME THEORY AND CONFLICT ANALYSIS ........................................................................ 30 6.1.1 CONFLICT ANALYSIS ................................................................................................................................ 30
6.1.2 GAME THEORY ...................................................................................................................................... 30 6.1.3 COMPARISON OF GAME THEORY AND CONFLICT ANALYSIS ............................................................................ 31 6.2 REFLECTION ON SOCIAL NETWORK ANALYSIS ........................................................................................ 31 6.3 COMPARISON OF OUTCOMES ............................................................................................................ 32 7. CONCLUSION AND RECOMMENDATIONS ..................................................................................... 33 7.1 CONCLUSIONS OF METHODS ............................................................................................................. 33 7.1.1 CONFLICT ANALYSIS – IDENTIFYING CUTTING STRATEGIES .............................................................................. 33 7.1.2 GAME THEORY – ASSESSING BUSINESS EXPANSION STRATEGIES ..................................................................... 33 7.1.3 SOCIAL NETWORK ANALYSIS – EFFECTS ON SOCIAL NETWORKS ...................................................................... 33 7.2 OVERALL CONCLUSIONS AND RECOMMENDATIONS ................................................................................. 33 REFERENCES....................................................................................................................................... 35 APPENDIX A. RETAIL SALES GROWTH ............................................................................................... 37 APPENDIX B. STAKEHOLDER ANALYSIS ............................................................................................. 38 APPENDIX B.1
FORMAL CHART ........................................................................................................ 38
APPENDIX C. NON-QUALIFIED WORKERS AVERAGE SALARIES ........................................................... 45 APPENDIX D. THE INCREASING TREND OF E-BUSINESS ...................................................................... 46 APPENDIX E. REMOVING THE INFEASIBLE SCENARIOS FROM ALL THE POSSIBLE COMBINATIONS....... 47 APPENDIX F. SCENARIOS TO BE MAINTAINED................................................................................... 49 APPENDIX G. ACTORS’ PREFERENCES OVER THE ACTIONS ................................................................. 50 APPENDIX H. PAYOFFS OF THE GAME MODEL .................................................................................. 53 APPENDIX I. PAYOFFS AND SCENARIOS OF THE GAME MODEL .......................................................... 55 APPENDIX J. COMPLETE GAME THEORY MODEL ............................................................................... 59
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1. Introduction In this section ASDA’s problem of a stagnating market share is made explicit and the goal of this report is elucidated together with the methodology used.
1.1 ASDA’s stagnating market share Despite being one of the four biggest supermarkets in the UK, the market share of ASDA has stagnated over the last twelve years (Erickson, 2014). While the volumes of sales in UK’s supermarket industry increased by 3,9% in August 2014 compared to the previous year, and the amount spent increased by 2,7% (Appendix A), the market share of ASDA increased by only 0,2% (Figure 1). The size of the market share is important for supermarkets in general because it forms an important source of competitive advantages. A big market share allows a supermarket to benefit from economies of scale through i.a. a buying advantage (source products more cheaply), volume advantage (selling high volumes allows for smaller profit margins) and advertising scaling. Because these competitive advantages can be translated into increased profits all supermarkets focus on having an increasing market share. ASDA’s problem of a stagnating market share is very much a multi-actor problem and the conflict is evident. An increasing market share for one supermarket by definition means a decreasing market share for another. Any strategies that ASDA implements will thus evoke reactions from its competitors, which are mainly composed of three other big market shareholders and several smaller supermarkets. The price wars between super markets are as well-known as they are numerous. Because supermarkets take on an important role in society this fight between giants (the four biggest supermarkets have a combined revenue of well over £100 billion (Irish Examiner, 2014) is closely watched by governmental bodies that aim to protect the consumers and fair competition. Several governmental bodies are in charge of enforcing strict rules for i.a. the pricing, advertising and the quality of the products. Besides the supermarkets and the governmental bodies also the consumers, with their buying power, and the suppliers, holding important resources, have an important role in this problem arena and can respond too on supermarkets’ strategies. During the last twelve years ASDA has tried to adopt several strategies to regain their increasing market share. The last four years ASDA has tried to increase their market share in foreign countries but this was no success. Currently ASDA is again focussing on the domestic market but it is still looking for strategic/policy advice that could revive their golden years of the period between 1994 and 2004 when they rallied to become the second biggest UK supermarket.
1.2 Goal of report The goal of this report is to help ASDA by providing an answer to the following problem statement: “What strategies can ASDA adopt to regain an increasing market share, while taking into account the potential actions of the other actors and the corresponding consequences?”. This report makes use of actor and strategy models to produce the required knowledge and insights into the potential strategies and policies that can be used to reach ASDA´s goal.
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“If a firm is able to concentrate its expense over the capabilities that make a real difference in terms of winning the market, it is not only able to cut costs but also to invest in areas of business that will cause them to thrive and to grow” - Cesare Mainardi, Strategy& CEO (Cut Costs, Grow Stronger, 2009) A successful strategy or policy for ASDA to gain their desired market share will be composed of two parts. First of all, an area or business aspect has to be identified where ASDA can target a strategy on to develop or improve itself and become more attractive to consumers in order to increase its revenue (and thus its market share). Secondly, the financials have to be made available to implement these strategies successfully. For ASDA, a strategy can thus be viewed as the relocation of financial resources.
1.3 Methodology and structure In order to determine a well-founded strategy for ASDA the following systematic method was followed: 1. 2. 3. 4.
Performing literature research. Establishing the problem formulation and boundaries. Identifying and exploring potential strategies. Formulating conclusion and recommendation.
The methodology used to identify and explore potential strategies and related outcomes was composed of two steps and three methods, all of which make use of a stakeholder analysis. This analysis will first study the conflicts among stakeholders triggered by possible strategies of cost cutting in certain business aspects. For this the Conflict Analysis method is best suited and used in this report. The strategies that ASDA can adopt to gain more market share in certain business aspects will be explored using the Game Theory method. In the second step of the methodology a third method is used to explore and visualize the effects and the consequences on ASDA’s social network on the results from the game theory and the conflict analysis. The effects of the outcomes of the first two methods are project on ASDA´s social network using a Social Network Analysis.
The underlying stakeholder analysis is presented first in section 2. Then in section 3 and 4 the different strategies for cost cutting and business opportunities are presented respectively. Section 5 will then show the results using a social network analysis. Subsequently, in section 6, the three methods will be compared. The characteristics and differences among the methods are compared with each other. Section 7 concludes the report and will summarize the results obtained and provides recommendations for ASDA.
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2. Identification of stakeholders As with most multi-actor problems a stakeholder analysis provides a good overview of the stakeholders in the problem arena and forms a good first approach to understanding the multi-actor network a problem is occurring in. A stakeholder analysis is thus also part of this report and can be found in Appendix B. The main findings are summarized in Table 1.
The conflict and dilemma in ASDA’s problem are evident again: all supermarkets aim to increase their market shares, which is impossible. Note that the stakeholder analysis provides no information about possible interactions between the actors and consequences thereof, the stakeholder analysis provides a snapshot of the situation. For the dynamic interactions so-called actor analyses and strategy models described in the methodology can be used. In Figure 3 a power/interest grid of the stakeholders in the problem arena is displayed. It displays what actors ASDA should be more aware of than others because they have more power and are more likely to act when disadvantaged. The critical actors usually hold important resources and are likely to act when their interests are harmed (further elucidated in Appendix B).
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3. Selection of cost-cutting strategy A successful business strategy for ASDA is about cutting costs in one place and relocating the new available resources to business aspects where they can be leveraged better, as explained in the introduction. This section is about identifying and exploring cost cutting strategies ASDA can adopt.
3.1 Identifying cost-cutting strategies The first step in identifying potential strategies to cut costs is to determine what ASDA’s costs are comprised of. Figure 1 shows a breakdown of the total costs of ASDA in 2013. Many strategies can be identified that focus on the different types of costs ASDA has.
ASDA's cost breakdown Wages and operational
19% 6% 75%
Other Purchase
The main supermarket chains in the UK act as a link between more than 7000 suppliers and around 25 million consumers, as we can see in Figure 4. The four biggest supermarkets combined control more that 88% of the food market share. This power means that also ASDA has a strong control over the supply chain of consumable and non-consumable products in the country. This power is the basis for the first identified strategy to cut-costs. ASDA should use this power to push suppliers’ margins (Nicholson, 2012). Wages also form a significant part of ASDA’s costs. Given the fact that ASDA has relatively high wages at the moment (Appendix C), cutting these wages would be another evident strategy to cut the costs. This report thus focusses on one strategy to cut the selling, operating and administrative expenses; the cutting of costs on wages, and on one strategy to cut the costs of the goods sold; reducing the prices ASDA pays to the suppliers by putting more pressure on them.
3.2 Exploring the strategies Any strategy involving ASDA’s employees will most likely trigger a response from them and their workers´ union GMB (Shaw, 2005) because they will resent their lower wages. ASDA’s competitors will also act, because they will try to compensate for the competitive advantage ASDA is gaining over them, possibly through also cutting costs. By the second strategy, of trying to reduce the cost of goods sold (changing suppliers’ margins), ASDA will most likely trigger reactions from its suppliers, the competition and markets authority (Seely, 2014) and from its competitors also which might tend to copy any successful strategy. It is important for ASDA to be aware of the consequences of the possible strategies of the other stakeholders as these consequences could impact the expected benefits from ASDA’s strategies. The goal of this section is to advice ASDA on which of the strategies it could adopt best to reduce its costs while taking in consideration the conflicts that may arise from the actions of the other stakeholders. This is summarized in the following research question: “How can ASDA reduce its main costs (in order to invest in strategies of 8
growth), taking into consideration the different interests that stakeholders have over this issue, and the conflicts that might arise with its actions?”. To answer this question and study the conflicts among stakeholders triggered with possible strategies of cost cutting, the Conflict Analysis Method will be applied. It helps to structure the key actors in this conflict, their main interests and preferences, and the actions they have to exert control over the problem and situation (Hermans & Thissen, 2009).
3.3 Conflict Analysis method Conflict analysis is a non-quantitative method that makes the game theory more practical and intuitive without the necessity of measuring each and every payoff. It was presented by Howard in the 1960s and the analysis shows which scenarios are likely to exist and which actors are going to control the sequence of events (Howard, 1971). First the relevant issues for the case have to be determined and then the actors that control them, either directly or indirectly have to be identified before understanding how they achieve that. The dependency between actions also has to be identified in order to have a realistic set of scenarios, i.e. a combination of individual strategies that together form one of the possible outcomes of the game. In its turn, these individual strategies are the options that stakeholders choose to implement (Hermans and Bots, 2002). Then it is necessary to clarify the stakeholders’ preferences over the actions before analysing the final results and drawing conclusions. In Figure 6 the methodology of Conflict Analysis can be seen.
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3.4 Application of Conflict Analysis In this section the Conflict Analysis method is applied to the case. 3.4.1
Identifying the relevant issues and stakeholders
As explained in section 3.1, the cost of goods sold and the cost of wages are the biggest costs of ASDA. Moreover, the increasing e-business trend (for more information about this topic, look at Appendix D), and the strong position of ASDA in the supply chain of consumable products open a window of opportunity for possible strategies to act upon them. Two issues will be analysed in parallel: The conflicts that arise with the reduction of suppliers’ margins (the chosen way to reduce ASDA’s cost of goods sold, motivated by the strong position of ASDA in its supply chain); The conflicts that arise with the reduction of the wages cost (by reducing employees’ salaries or by firing them, motivated by the increasing trend of e-business). The stakeholders that control these issues, either directly or indirectly, where grouped, as it can be seen in Figure 6. This number of stakeholders is thought to be good for the method applied, is it big enough to capture the overlapping perceptions between them. Regarding the main competitors, the three supermarket chains (Tesco, Morrisons, and Sainsbury’s) are grouped since they have the same interest, increase their own market share. This group will act as an important stakeholder in both issues, as well as ASDA, the problem owner of the analysis. In the issue “reducing suppliers’ margins” the Competition and Markets Authority and ASDA’s suppliers will be the other stakeholders to take into consideration. In the issue “reducing wages cost” the employees’ coalition is taken into consideration. The coalition joins ASDA’s employees with Britain’s General Union (GMB). The first wants high salaries and job security, while the second works for ensuring it to its affiliates (see Appendix B). The union is the “vessel” used by the workers to assure their interest.
3.4.2
Understanding stakeholders’ actions
Now it is important to understand how the stakeholders can exert their control, which options they have as well as the relations of dependency between them. The answer to these questions can be seen in Table 2, as well as a short description of the stakeholders.
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The assumptions made to select a proper set of actions and the relations of dependency between them for the issue “Reducing suppliers’ margins” can be seen below: ASDA It is assumed that ASDA only has one option to meet its objective, which is reducing its suppliers’ margins. Otherwise it does nothing. Since the objective is only to study the impact of reducing its suppliers’ margins, the simplicity of the analysis is a guideline. Main Competitors Again, having the simplicity of the analysis as a guideline, it is chosen that the main competitors can only copy/take initiative of a reducing suppliers’ margins strategy. Otherwise they do nothing. Competition and Markets Authority The aim of the Competition and Markets Authority is to assure that markets work well for the consumers, businesses and economy (Gov.uk, 2014), and so, if both ASDA and Main Competitors choose to reduce their suppliers’ margins at the same time, it will appear as if both had cooperated to not give suppliers any chance. It can then act and suppress supermarkets’ activates since this is considered unfair competition, and it is illegal. Otherwise, if it is not able to prove the unfair competition, or only ASDA or its main competitors reduce their suppliers’ margins, it does nothing. ASDA’s Suppliers When forced to reduce their margins over the products sold, it is assumed that ASDA’s suppliers can react in two ways. They can accept the new directives and do whatever they can to maintain a good relation with ASDA, or they can end the contract and try to change their business partner, not fulfilling the new directives and starting a new business relationship with one of ASDA’s main competitors. However, they only change their business partner if the profits they can have with them are bigger than with ASDA, that is, if the main competitors don’t reduce their suppliers’ margins. If ASDA does nothing or the Competition and Markets Authority suppresses supermarkets actions, then ASDA’s suppliers don’t have to do anything too. The assumptions made to select a proper set of actions and the relations of dependency between them for the issue “Reducing wages cost” can be seen below: ASDA ASDA’s aim is to reduce costs with its employees. It can achieve that by reducing their salaries or by dismissing a determined amount of workers. Otherwise, it does nothing. These are the only three actions considered possible for ASDA, in order to simplify the analysis. Main Competitors Again, having the simplicity of the analysis as a guideline, it is chosen that the main competitors can only copy/take initiative of a reducing wages cost strategy. Otherwise they do nothing. Employees’ Coalition Employees can protest against the reduction of their salaries and against the dismission of their fellow coworkers by reducing their productivity or by engaging in a strike. These are the actions assumed to be in employees’ power to protest. Otherwise, if ASDA does nothing, employees do nothing too. The simplicity of the analysis is a guideline, and so the set of actions for these issues is kept simple. Nevertheless, these actions are the critical ones to fully comprehend the consequences of ASDA’s behaviours. 3.4.3
Building a feasible set of scenarios
The next step is to clarify all the feasible scenarios in order to get a complete set of results. In Tables 3 and 4 the set of feasible scenarios for each of the issues can be visualized. To see the process of removing all the infeasible scenarios from all the possible combinations of actions, taking into consideration the relations of dependency between them, look at Appendix E. However, some scenarios should be maintained in order to draw the most appropriate conclusions. These scenarios are defined in Appendix F.
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In these tables, the number “1” means that the action is taken and the number “2” means that the action is not taken. Do nothing is also an option. It is also very important to take into consideration that each stakeholders’ action excludes the rest of its choices. The tables are also divided in groups, each group representing one of ADAS’s possible actions. 3.4.4
Clarifying stakeholders’ preferences’ over actions
It is also important to state the preferences of each stakeholder over the actions that all stakeholders may take. This is done by attributing a nominal scale to the options available for each stakeholder, which will lead to quantifiable results that are easier to interpret. These preferences can be seen in Tables 5 and 6.
For the first issue “Reducing suppliers’ margins”, ASDA prefers that its competitors do nothing, so it can gain some competitive advantage over them. It also prefers that their suppliers accept the new terms without protesting. For the issue “Reducing wages cost”, ASDA prefers that its competitors do nothing, so it can have a momentary advantage over them, in terms of available resources. It also prefers that its employees understand its position and do not engage in any type of protest. For a more complete overview over all preferences, look at Appendix G.
3.5 Final results and interpretation Now that all the possible scenarios are defined as well as the stakeholders’ preferences for each option, the results can be summed up in two final tables that give the outcomes for each scenario. Look at Tables 7 and 8.
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From the analysis of these tables it is possible to see that the aggregated preference of the system is highest in S1 for the issue “Reducing Suppliers’ Margins” and in S5 for the issue “Reducing Wages Cost”, while for ASDA it is highest in S3 for the issue “Reducing Suppliers’ Margins” and in S3 and S9 for the issue “Reducing Wages Cost”. Based on the preferences of each stakeholder and on the unilateral improvements that they can do to improve their position without the cooperation of other stakeholders, it is possible to depict a strategic map for each issue, as you can see in Figures 8 and 9.
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From the analysis of these maps it is possible to identify quicker the stable scenarios, that is, the scenarios that can occur more easily without any cooperation between the actors. For the Issue “Reducing Suppliers’ Margins” it is S4 and for the issue “Reducing Wages Cost” it is S2. Next, there are the interpretations for both issues. 3.5.1
Interpretation: reducing suppliers’ margins
ASDA is the first to play and can choose reducing its suppliers margins or not. If it chooses to do nothing, its main competitors will take the initiative and go for a strategy of reducing their suppliers’ margins themselves, which will end in S5, one of the worst possible scenarios for ASDA (with an outcome of 5). On the other hand, if ASDA is the first to reduce its suppliers’ margins, its main competitors will not do the same, because if they do, the maximum outcome they get is 5 (since the Competition and Markets Authority will act). However, if they do nothing, ASDA’s suppliers will likely change their business partner, ending up in scenario 6, with a final outcome of 6 for the competitors. There’s an increase in the outcome of the competitors because the suppliers will probably start doing business with them instead of ASDA. Nevertheless, the outcome in S4 for ASDA is also 6, higher than in S2, if it does nothing, but lower than if S3 and S5. Though, is not possible for ASDA to achieve these scenarios without cooperation. 3.5.2
Interpretation: reducing wages costs
In this issue, whatever ASDA do, their main competitors will try to go for a reduce wages cost strategy. Moreover, if ASDA reduces their suppliers’ salaries or dismisses a determined number of them, its employees will likely engage in strikes and protests, backed up by Britain’s’ General Union, which can be seen in the moves from S6 to S8 and S12 to S14. This is especially bad for ASDA since it will lead to a drop in sales and will act as bad publicity for the company. The outcomes for ASDA if it reduces its suppliers’ salaries or dismisses them are 3. On the other hand, if ASDA does not take these measures, knowing that its competitors somehow will, its final outcome will be 4, in S2. These reflects to things: that public image is very important for ASDA and that this market is extremely competitive. This outcome is far from the 16
optimum outcome ASDA could get in this issue (6), but again, achieving it without cooperation will be extremely difficult for ASDA.
3.6 Conclusion and recommendations Regarding the issue “Reducing suppliers’ margins”, without any cooperation, ASDA should try to be the first to reduce its suppliers’ margins. This will repel its competitors from doing the same since they will be afraid of the high fines that the Competition and Markets Authority could give. If it misses the window of opportunity for being the first to apply this measure then it should not go for this strategy of cutting costs. A negative aspect of this strategy is that its suppliers might change their business partner, that is, they will stop doing business with ASDA to start doing business with one of its competitors. Products that once were in ASDA’s shelters will be now in their competitors’ shelters, and this can lead to its customers to change supermarkets too. To avoid this, ASDA should cooperate with its suppliers and improve the relation with them. This could improve the contracts it has with its suppliers like improving the quantity of products bought at each time or the number of years bound legally to suppliers by the contracts, giving them confidence and security in the business relation. Regarding the issue “Reducing Wages Cost”, without any cooperation, ASDA should not engage in any sort of wages cost reduction strategy. If it does the consequences of its action will be worse than the benefits. Since ASDA uses its brand image as a central part of its selling strategy, suffering public strikes will have a serious impact on their sales. Nevertheless, the way to improve its position in this issue is actually reduce their suppliers’ salaries, since this action will be less likely to lead to public strikes than firing workers. Doing this without cooperating with its employees is impossible though, ASDA has to improve its attitude towards them. For achieving this it can improve employees’ working conditions and establish professional development plans as well as improving its position and dialog near Britain’s General Union. An advantage for ASDA is that it actually already pays a higher average salary than its main competitors, as can be seen in Appendix C. Another advantage of this improvement is that its competitors are already taking measures regarding costs cutting with employees’, engaging in several dismissals since the beginning of the year (BBC.com, 2015 and Thetimes.co.uk, 2015), which will take the focus out of ASDA if it engages in similar actions. For now, without any sort of cooperation, ASDA should only go for reducing its suppliers’ margins in order to reduce its main costs. Reducing wages cost still needs to be equated, especially the regarding the relation that ASDA has with its employees.
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4. Assessing business strategies of growth A successful business strategy for ASDA is about cutting costs in one place and relocating the newly available resources to business aspects where they can be leveraged better. This section is about identifying and assessing those potential strategies so that it allows ASDA to increase their market share.
4.1 Identifying suitable strategies Identifying a successful business strategy is difficult as many factors play a significant role in its success and it is unfeasible to take all of these into account. Factors that influence business strategies can range from how well the national economy is doing to how well the labour market is doing, to the prices of fossil fuels and even to the outcomes of wars. Most, if not all, of these factors are highly uncertain and nearly impossible to predict. Choosing a successful business strategy is therefore usually about identifying the most robust strategy; the one that performs best overall under all different possible scenarios. For ASDA, there are many different strategies it could adopt to potentially increasing the market share. It could e.g. increase or decrease the price of certain goods, focus more on e-shopping, increase the quality of specific goods or increase the diversity of the products offered. Considering all of these strategies in this report would be impossible due to time constraints. Therefore a selection among these strategies is made, presented in Table 9. These three strategies were chosen based on the literature study performed and were considered most plausible.
4.2 Evaluating successful strategies by their estimated payoffs Assessing strategies for ASDA to increase its market share will be done using payoffs. This value represents a score for the estimated feasibility, profitability and risk of the strategy. Although many of these influencing factors are uncertain, one thing can usually be assumed: if it is possible for other actors to react on ASDA’s strategies to either achieve their own goals or improve their own situation then they will do so; they act rationally. These counter strategies don’t necessarily have to impact ASDA negatively, but sometimes they do. They therefore form a factor in the possible success of ASDA’s strategy and influence the payoffs. ASDA should thus take these possible reactions and counter strategies into account. It is thus necessary to investigate the three different strategies considered for ASDA under the different scenarios possible, i.e. combinations of the strategies. The goal of this section is to advice ASDA on which of the strategies it could adopt best to increase its market share while taking into consideration the counter strategies that other stakeholders may adopt. This is summarized in the following research question: “How can ASDA increase its market share, taking into account the different interests that other stakeholders have over this issue, and the conflicts that might arise with its actions?”. To answer this questions and identify the most robust business strategy for ASDA the Game Theory method was be applied. This method studies the strategic decision-making and helps evaluating the different possible scenarios and corresponding payoffs for ASDA. 18
4.3 Game Theory method Game theory makes use of mathematical models of conflict between rational decision makers (Myerson, 1991). This implies that each player involved in the `game` will try to determine the optimum action that it can take whatever the rest of the other players chooses to implement. Game theory is available for different situations, categorised as cooperative or non-cooperative (referring to the cooperation between the actors) and simultaneous or sequential (referring to decision-making). A game theory model makes use of several elements, of which the most important are considered: players, actions, payoffs and rules or information. All these elements together are referred to as the “rules of the game”. Players will attempt to find the best way that will help them maximize their payoffs, which is known as a strategy. The combination of strategies chosen by each actor that is known as the equilibrium scenario helps the modeller to find the optimum outcome of the game (Myerson, 1991). The final outcome is based on two concepts: the dominant strategy, which is the optimum solution and the “Nash equilibrium”. The latter concept is a solution concept, which implies that no player involved in the game has incentive to deviate from his strategy given that the other players will not deviate too. The methodology used can be seen in Figure 11.
4.4 Application of Game Theory This subsection is about the application of the game theory. In the subsections the four different main elements of the Game Theory are elucidated: players, rules, consequences and payoffs. 4.4.1
Players of the game
Five different actors have been selected for the game due to its relevance and stake in the possible strategies that ASDA could adopt: Tesco, ASDA, Sainsbury’s & Morrison’s, Low Cost Supermarkets and the UK Government. To facilitate the process of the game theory analysis Sainsbury’s & Morrison’s were grouped together because it is assumed that their interests are similar. The same holds for low cost supermarkets. On the other hand, consumers have been deliberately excluded from the analysis since these
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are very unpredictable and this study was more interested in the reactions the other stakeholders could adopt in reaction to ASDA’s strategies (also seem Appendix B).
4.4.2
Possible counter strategies
This section explains the different strategies that ASDA could implement to gain market share and the possible reactions of the other actors involved in the game. The described strategies are very general but are not worked out in more detail because it does not add to the usefullnes of the analysis. In 10, Table 11, Table 12 and Table 13 the possible type of actions that every actor of the game could implement are described. Action Increase diversity Increase quality Reduce price
Description This action intends to represent a set of strategies in which ASDA targets new retailing markets (electronics, consumer products, …) Increasing the quality of their edible products might attract more consumers to their retailing stores. Reducing the price of their products might improve their public image and attract more consumers.
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4.4.3
Payoffs
The payoffs in the game theory model refer to the utility that each player would receive in a specific outcome of the game (Schelling, 2010). In the developed game model the calculations regarding the market share or benefits that each of the food retailers could earn for every scenario have been avoided; given the uncertainty and complexity of these factors it would not contribute to the usefulness of the analysis. It is still possible to quantify numeric outcomes for every player in every scenario of the game model though. To do so, five different fields of interest for the players have been considered in the computation of the payoffs. These are: resources, benefits, public image, risk and completeness. These factors have been evaluated on an ordinal scale (-3 to 3). For more information about the quantification of the payoffs please be referred to Appendix H. The payoffs and their computations assigned to every scenario are elucidated in Appendix I were also the possible scenarios of the game are shown. 4.4.4
Rules and boundaries of the game model
Several rules and boundaries were established or assumed for the use of the model: 1. The behavior of consumers was considered out of the scope of the game. The reaction of the consumers is very difficult to determine and this report focussed on the strategies that the other supermarkets could adopt in reaction to ASDA’s actions. 2. It is assumed that the provided game tree in Figure 13 is a deterministic game. Given that it is difficult to estimate the probability that a set of strategies produces a specific outcome in the benefits or public image categories of the estimated payoffs, the chance hasn’t been considered in this game. As it was stated before, the model is more interested in the reaction of the other supermarkets to ASDA’s strategies. 3. Taking into account that supermarkets advertise their strategies publicly, it was assumed that every supermarket knows what the competition is doing at every moment. The game was thus modelled with perfect information. 4.4.5
Game Theory model
Figure 13 shows the developed game model in its extensive form (a larger version of the game model is presented in Appendix J). 21
Figure 13 - Overview of the game model in its extensive form. ASDA (blue), Tesco (red), Sainbury's & Morrisons coalition (orange), Low cost supermarkets coalition (green) and Government (black).
4.5 Final results and interpretation Looking at Figure J1 in Appendix J, it is possible to distinguish three possible scenarios concerning the strategies that ASDA could take. These three possible scenarios are shown in Appendix J in Figure J2, Figure J4 and Figure J6. In order to determine which reactions the actors of the game are more likely to adopt the game models without dominated strategies are shown in Appendix J in Figure J3, Figure J5 and Figure J7. Dominated strategies are defined as the actions that a player might make, that are strictly inferior to other strategy, no matter what the other actions the rest of players take (Rasmusen, 2007). Figure J3 in Appendix J shows that if ASDA increases the quality of their products it is very likely that both Sainsbury’s and Morrisons will react to ASDA’s strategy by increasing the quality of their products also. It is not very likely though that the coalition of low cost supermarkets will react by increasing their quality too. The second set of possible scenarios in which ASDA increases the diversity of their retail stores (Figure J4 in Appendix J) shows how other actors of the game might react. As Figure J5 reflects it is very unlikely that neither Sainsbury’s nor Morrison’s would try to increase the diversity of their products too. Both food retailers have been considered as risk avoiding actors and the fact that they have been traditionally targeting a different kind of market explains why it is very unlikely that any of these will try to implement a counter strategy related to the diversity of their products. The reaction of the low cost supermarkets is more uncertain though. Depending on Tesco’s actions (increasing or maintaining the diversity of their products) they might be interested in implementing a counter strategy. The last set of possible scenarios concerns a strategy in which ASDA could try to reduce the prices of its products (Figure J7 in Appendix J). This set of scenarios is more uncertain than the other two, given that the government might interfere when prices get too low (reducing prices would probably be associated with lower margins for the suppliers and unfair competition between food retailers). In the scenario where ASDA could try to decrease its prices it is very likely that the coalition of low cost supermarkets would decrease their prices too. Because low cost supermarkets normally have contracts with suppliers from all around the world, it is reasonable to think that these wouldn’t experience too much trouble in finding new suppliers with lower prices and lower quality. On the other hand, it is very unlikely that neither Morrison’s nor 22
Sainsbury’s would try to reduce their prices, given that they target a different kind of costumer. Regarding to Tesco’s reaction, it is not likely that it will try to reduce its prices (targeting a new kind of costumer) while it is expanding the brand abroad. Regarding to the regulations that the government could make, it is expected that if all the main supermarkets reduced their prices, the government would probably regulate the low prices, resulting in huge losses for all the supermarkets. Finally, a very interesting outcome offered by the game model was related to the fact that even if Tesco tried in the beginning to implement a counter strategy to ASDA’s possible actions, it is very unlikely that Tesco would try to hold their fight for the market share with ASDA in the UK, rather than keep focusing its resources in the expansion their currently facing.
4.6 Conclusion and recommendations Both the Nash equilibrium and the dominant strategy of the game model were identified as the strategy in which ASDA increases the diversity of their products and the other actors maintain its diversity. These concepts shouldn’t be understood as absolute solutions for the problem owner though; it is more likely that ASDA finds less opposition from the other food retailers when increasing the diversity of their products. Yet, it should be taken into account that even if ASDA wouldn’t find much opposition from the other food retailers when increasing the diversity of their products, it should be expected that Sainsbury’s and Morrison’s increased their product quality, or that the low cost supermarkets of the UK reduced their prices. Both counter strategies (which are out of the scope of the game model) could reduce ASDA’s market share. The most valuable information that the game model could bring to ASDA is linked to the fact that Tesco is not expected to implement aggressive strategies against ASDA’s. Even if in reality Tesco tried to fight back ASDA’s strategies, it is not expected that ASDA could find a great opposition from Tesco, since the last one is currently immersed in its expansion abroad. Taking into account both the game model and the critic thinking of the analysts of the project. It is concluded that it is more likely that ASDA could succeed when increasing the diversity of their retail stores. Still, ASDA should be prepared for strategies regarding the quality of the products or a reduction in the prices from low cost supermarkets.
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5. Effects of strategy on ASDA’s social network This section provides insight into the effects of the strategy of cutting costs and increasing product diversity.
5.1 Effects of strategies ASDA’s market share is very dependent on the relation the supermarket has with its customers, as it is for any supermarket. The customers form the sources of revenue after all. The suppliers might also be just as important because they hold another critical resource in the value chain, the actual products. The set of all relations ASDA has with other actors is referred to as ASDA’s social network. Because some relations are critical to ASDA’s business success, ASDA should be aware of the status of these relationships over time so that they can safeguard the desired strengths and if possible anticipate on problems. It is thus also important to be aware of the consequences of the proposed strategy for ASDA of putting pressure on suppliers to decrease costs and investing in product diversity on ASDA’s social network. Insight has to be obtained in what connections between actors would become under pressure or even break if a certain strategy is adopted. This can be formulated in the following research question: "What pitfalls should ASDA be aware of if they want to adopt the proposed strategy of putting pressure on suppliers to decrease costs and investing in product diversity, while preventing significant and unrecoverable damage to ASDA’s social network?”. To answer this question ASDA’s social network was mapped and visualized using a Social Network Analysis. The resulting network was then be used to see in what way the proposed strategy would affect ASDA’s social network. Overall, the purpose of this triangulation of methods is thus to gain a more robust insight and understanding of the potential strategies presented in the previous two sections. Additionally, this method was also used to find additional consequences of the strategy that might have been overlooked in the previous sections by looking through a different lens at the strategy.
5.2 Social Network Analysis method Social Network Analysis (abbreviated SNA) is mostly used to perform descriptive analyses of problems. It offers a way to visualize an actor’s social network and highlight important characteristics of this network. It can provide insight in how the actors are connected or not connected to other others, which actors have the most important role and power and which actors hold key connections to other actors. The focus of SNA is on how the actors interact in a system with certain boundaries, corresponding to the issue. The core concepts of an SNA are (1) the network, a set of ties among actors (2) the actors, discrete social units and (3) the ties between the actors, referring to connections of interests such as formal relation and business relation (Wasserman & Faust, 2008). In order to map and visualize the SNA, a computer program to model the social network is used in this study. The methodology used can be seen in Figure 13.
Figure 13 - Social network analysis methodology.
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5.3 Application of Social Network Analysis First a decision has to be made for the definition of the links in the social network. Because ASDA is looking for a business strategy the links were chosen to represent business-to-business (B2B) relations between the actors, all interactions involving the exchange of money or goods. In the data file that was used to construct the social network different strengths of the links were specified. A relatively strong link between ASDA and an actor indicates that ASDA does relatively much business with the actor. Subsequently the selection of the actors to be included in the social network has to be determined. Including all the actors in the UK supermarket industry with links to ASDA would probably make the resulting web of connections too big and lack clarity. Gathering reliable information about all these actors was difficult though. As interviews were beyond the scope of this report the identification of the actors was mostly based on newspaper articles and official documents from ASDA. Despite of the limited number of good quality sources over 30 suppliers could be identified. Fortunately it is not necessary to include all actors and relations for the purpose of this report. A smaller network can be used, with only the most relevant actors and some grouped actors. The included actors are summarized in table 14. Type of actors Consumers
Description The consumers are split in 12 categories, corresponding to different classes and types of consumers (low, middle and high class and electronic, household and food type). ASDA has many suppliers, of which three of the biggest ones have been identified as Unilever, Dageo and Mondelez International. These suppliers are included individually, all the other suppliers are grouped as “Aggregated wholesaler”.
Suppliers
Note: most of the suppliers produce their own products, and thus are not officially wholesalers, but also act as a retailer of smaller brands. Unilever for example produces a wide variety of own products but is also the only seller (and partial shareholder) of brands like Dove, Sunsilk and Lipton.
Unions
Both the consumer and supplier Union are included as they have quite some power in the supermarket industry and have strong ties to many actors.
Environmentalists and competition commission
Both the environmentalists and the competition commission have no real business link to any of the other actors. They act passively as watchmen. The competition commission regulate how the supermarkets compete with each other and the environmentalists track the supermarket's waste and carbon footprints. Table 14 - Groups of actors to be included in the social network.
5.4 Resulting social networks and interpretations With the definition of the links and the actors determined the social network can be created. The purpose of this section is to analyse the effects of the complete business strategy of putting pressure on suppliers to decrease costs and investing in product diversity. The results of the two partial strategies are presented in different figures. 5.4.1
The general social network
The resulting main network is presented in figure 14.
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Figure 14 – Social network of ASDA.
The circle sizes in the model represent the actors' degree of centrality. The bigger the circle means the actor is connected to more other actors. It is clear that ASDA has the most connections, represented by its circle size, which is the biggest. Some interesting characteristics of the network are presented in table 15. Actors ASDA Consumer Union Supplier Union Aggregated Wholesaler Diageo Unilever Red Star Grower Mondelez Customers
Degree 52 11 6 23 25 31 16 18 4
Betweennes 1250 66 121 619 442 524 233.5 358 .154
Density 23 13 10 11 9 10 7 8 3
Table 15 - Network characteristics.
The following observations and corresponding interpretations can be made from the general social network: ASDA has the greatest degree, betweennes and density compared with the other actor. It is because ASDA is connected to most actors and also play important role connecting several groups of actor. For example, it connects the suppliers to the customers. Therefore, ASDA is the most influential actor in the network. ASDA is directly connected to three big wholesalers and on aggregated wholesaler. Via these wholesalers ASDA is connected to the product brands under the wholesalers’ management. It can e.g. be seen that the wholesalers have a crucial position in the indirect connection of ASDA to these smaller brands. ASDA is thus very vulnerable to losing a connection to one of the wholesalers as it 26
would imply the loss of the indirect connection to the smaller brands. Obviously specific brands will attract certain customers, so ‘losing’ these brands will probably have implications for ASDA. There are two unions in the model, the consumer and supplier union that are both acting as a broker between the interests of the consumer and suppliers respectively and ASDA. Through i.a. collective labour agreements and trade deals ASDA is linked to these unions. 5.4.2
Effects of putting pressure on suppliers
The effects of the strategy of putting pressure on suppliers (to decrease costs), as explained in section 3, on the general social network are presented in figure 15.
Figure 15 – Social network of ASDA
The following observations and corresponding interpretations can be made from the general social network: If ASDA were to put more pressure the Social Network in Figure 5 shows that ASDA has to be careful not to break the ties to certain actors (i.e. Diageo, Unilever, Mondelez International, and the Aggregated wholesaler), as they are the brokers to several suppliers under the big company's management. This might lead to ASDA losing some group of customers that interested in some specific brand of products. 5.4.3
Effects of increasing product diversity
The effects of increasing product diversity, as explained in section 4, on the general network of ASDA are presented in figure 16.
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Figure 16 - The resulting Social Network if ASDA would implement the “Increase product diversity”.
The following observations and corresponding interpretations can be made from the social network: The “Increasing product diversity” strategy can be visualized in figure 16 by determining the new strengths of the ties connecting ASDA to the consumers and suppliers. The green lines indicate that the strength of connections will increase and the red lines indicate that the strengths of the connections will decrease. ASDA will thus gain a stronger connection with lower and middle class customer but the connection with upper class customer will be weaker. This is based on the assumption that the lower and middle class people react positively to a bigger offer of products whereas for upper class people it might have the opposite effect (Iyengar & Lepper, 2000). Though not visible from the graph, research into the effects of the strategy on the links with the customers showed that if the range of products offered gets too big this will deter all types of customers (Iyengar & Lepper, 2000). ASDA thus has to be aware of this needed balance and keep this pitfall into mind when potentially applying this strategy.
5.5 Conclusion and recommendations The research question relating to the analysis of ASDA´s social network was: “What pitfalls should ASDA be aware of, if they want to adopt the proposed strategy of putting pressure on suppliers to decrease costs and investing in product diversity while preventing significant and unrecoverable damage to ASDA’s social network?”. The SNA indicated that ASDA should be aware of several potential risks of the strategies. Because if ASDA breaks an important link, the impact could be bigger if that actor is a broker. With SNA, two strategies from the previous to methods (i.e. conflict analysis and game theory) were analysed. By putting pressure on the suppliers ASDA risks the relation with these suppliers. In case the suppliers decide to stop working with ASDA, ASDA would lose the connection to certain products through the supplier. The customers who are looking for those products would then go to another supermarket. Only if ASDA can make a good deal with the supplier, and the connection will survive, the strategy can thus be applied.
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With the product diversity increase strategy, the relation with upper-class customers could be weakened. It is because they only go for some specific products. If the choice becomes broader they would find another supermarket. However, ASDA can gain stronger relations with lower and middle class customers and some supplier of the specified products since they prefer to go to supermarket with broader product choices and prices. Overall, this strategy would be beneficial if ASDA were to apply it. Some other interesting characteristics of ASDA’s Network also have been explored. It was found that the ASDA has the most power in its social network. However, it is still dependent to certain actors in the network. And if ASDA broke one link in the network, the effect will be multiplied, since ASDA also plays a role as broker between customers and the products. If actors on the other side cannot find what they want, they would go away from this network and ASDA might suffer a loss in market share.
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6. Reflection on methodology: methods and outcomes Three actor and strategy models were used in this report; conflict analysis, non-cooperative game theory, and social network analysis. This section will reflect on and compare these methods.
6.1 Reflection on Game Theory and Conflict Analysis As the non-cooperative game theory and the conflict analysis were both used to explore the potential benefits for ASDA for certain strategies it is interesting to compare these two methods and their outputs. The game theory was used to explore the best strategy for ASDA to leverage their resources for a bigger market share and conflict analysis was used to determine what strategy ASDA could adopt best to cut costs. 6.1.1
Conflict Analysis
Purpose: Conflict Analysis (CA) is used by actors to analyze and gain insight into their relationships with other actors which can be used to determine most-likely outcomes of certain decision-making situations. In this report CA was focussed on exploring the possible cost cutting strategies. Assumptions and structure: CA is a non-quantitative method. It assumes that the preferences of the actors for certain situations and scenarios are known and uses the ranking of these preferences to determine what the equilibrium will be. CA does thus not require the computation of a potentially difficult and uncertain payoff function, a ranking is adequate. In ASDA’s case the CA was very suited for the analysis of the conflicts regarding the costs because approximating the preferences of e.g. the employees was more reliable than establishing a payoff function. Outcome and contribution: CA combines the preferences of all the actors and uses this to determine an equilibrium or most likely scenario/outcome. Some insight can be obtained as how to this equilibrium is determined but the visualization (i.a. strategic maps) might not be that easy to understand. Ease of use: CA is not very capable of dealing with many actors because too many outcomes will have to be evaluated. In ASDA’s case the CA was performed for three and four actors which was manageable. 6.1.2
Game Theory
Purpose: Non-cooperative Game Theory (GT) was used to explore sequential decision-making and strategic behavior of all actors in the UK supermarket industry. The method was in particularly used to explore the best strategy for ASDA to leverage their resources for a bigger market share. Assumptions and structure: GT always assumes a rational behavior for all the actors involved, implying that they will always take the action that results in the most utility for them. This assumption could be made for the UK supermarket industry as companies and persons can be considered rational entities. The utility is expressed as a quantitative value resulting from a payoff function, which incorporates several factors like risk, profitability and resources and differs per actor as they usually have different interests and give different weights to the factors in the function. In ASDA’s case e.g. a different weigth was given to the factor of public image in the payoff functions of the supermarkets. Because some of the factors in a payoff function are very uncertain, like risk, the payoff function can be hard to determine at times and is usually based on assumptions, as was the case in this report. As a consequence this limitation has to be kept in mind while assessing the outcomes. Outcome and contribution: Making use of the payoff function GT allowes to combine all the actors’ strategic behaviors and identify the dominant strategy; the strategy that would result in most benefit despite of any of the other actors’ actions. For ASDA the equlibrium strategy was the increase in product diversity, while other supermarkets maintain their current diversity. Another contribution from GT is that it allowes to see how the equilibrium is determined through the goal tree. This provides insight for ASDA into how the competitors will react to certain scenarios. 30
Ease of use: GT can relatively easily handle many actors. In ASDA’s case five actors were used which was manageable although the game tree already got quite large which makes it more difficult to visualize the method. Computer programs can fortunately be used to determine the equilibria of the process so a large amount of actors is not of influence.
6.1.3
Comparison of game Theory and Conflict Analysis
A summary of the comparison of some main characteristics of CA and GT is provided in table 16. Method
Conflict Analysis
Game Theory
Required information
Purpose
Structure
Assumptions
Assess stability of outcomes based on preference ranking.
Policy game to identify stable outcomes of strategies, based on the ranking of preferences of the actors.
Actors with different options to exert control over and preference to certain outcomes.
Actors’ options and ordinal preference.
Determine equilibrium outcomes mathematically.
Quantitatvely evaluating strategic decisionmaking of all actors to identify potential outcomes/scenarios.
Actors with rational behavior for which the interests can be approximated.
Actors’ options and the corresponding payoffs.
Table 16 - Comparison of GT and CA. CA based on Hermans and Thissen (2009).
6.2 Reflection on Social Network Analysis The Social Network Analysis (SNA) was the method used to design and analyze ASDA’s social network. Because SNA is mostly a descriptive approach, modelling relations between actors and their respective strengths, the method was used in this report to map ASDA’s network and gain insight into the characteristics of it. One of the insights was i.a. which actors in the network were connecting ASDA to actors ASDA couldn’t connect to directly. These crucial actors thus form a brokering role for ASDA which gives them a certain amount of power of which ASDA should be aware and can make use. This report reversely made use of this insight. The impact to the network of the strategies obtained from the two other methods were analyzed so that they could be assessed more appropriately. The main difficulty of the SNA method was the gathering of information. Detailed information about the dispersed network was difficult to obtain, especially for ASDA’s network of suppliers. Interviews or surveys among the actors could have formed a solution but this was beyond the scope of this project. Method
SNA
Purpose Represent network structure using graph models and statistical analysis of relations.
Structure Relational characteristic of actor networks.
Assumptions
Required information
Actors and the relations between them.
Relation data.
Table 17 - Based on Hermans and Thissen (2009).
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6.3 Comparison of outcomes The three actor and strategy methods used all have different outcomes. Between CA and GT the outcomes were both equilibrium strategies and scenarios for the cost-reduction problem and resource allocation problem respectively. Both methods also provided insight into the process of reaching this equilibrium which can also be very useful to ASDA in future situations. The results from the SNA were mainly insights in ASDA’s network. This insight can be used in the decisionmaking to determine whether or not to apply the strategies and what precaution ASDA take. Method
Basis of analysis
Key outcomes/conclusions
Game Theory
Rationality of actors to maximize their payoff.
Equilibrium strategies/scenario.
Conflict Analysis
Rank of preference of actors for possible scenarios.
Most feasible scenario.
Social Network Analysis
Relations between actors.
Insight into network characteristics.
Table 18 - Comparison of key outcomes and conclusions.
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7. Conclusion and recommendations This chapter evaluates the contributions and conclusions that could be drawn from this report. Also the final recommendations for ASDA are presented.
7.1 Conclusions of methods The conclusions of and insights gained through the three actor and strategy methods used throughout this report are summarized now. 7.1.1
Conflict Analysis – Identifying cutting strategies
Research question: “How can ASDA reduce its main costs (in order to invest in strategies of growth), taking into consideration the different interests that stakeholders have over this issue and the conflicts that might arise with these actions?” Conclusions: For now ASDA should only aim for reducing its suppliers’ margins in order to reduce its costs. Reducing wages cost needs to be researched further, especially with respect to the effects on the relationships that ASDA has with its employees. 7.1.2
Game Theory – Assessing business expansion strategies
Research question: ‘How can ASDA increase its market share while taking into account the different interests that other stakeholders have over this issue, and the conflicts that might arise with these actions?’ Conclusions: Both the Nash equilibrium and the dominant strategy of the game model were identified as the scenario in which ASDA increases the diversity of its products and the other supermarkets maintain their product diversity. These outcomes indicate that it is most likely that ASDA will experience least opposition from its competitors when it would increase the diversity of their products and this strategy would thus be most successful. It should be noted that this is not the absolute solution for ASDA though. ASDA should still be prepared for strategies regarding the quality of the products from Sainsbury’s and Morrisons, or a reduction in the prices from low cost supermarkets, like LIDL or ALDI. 7.1.3
Social Network Analysis – Effects on social networks
Research question: “What pitfalls should ASDA be aware of, if they want to adopt the proposed strategy of putting pressure on suppliers to decrease costs and investing in product diversity while preventing significant and unrecoverable damage to ASDA’s social network?” Conclusion: ASDA should mostly be aware of the risk that it takes when they put pressure on the suppliers. The breaking of a business link with some of the suppliers can have a big impact on the product diversity that ASDA can offer as the suppliers hold a critical position in connecting ASDA with several brands.
7.2 Overall conclusions and recommendations The research question formulated in the introduction was: What strategies can ASDA adopt to regain an increasing market share, while taking into account the actions of the other actors and their consequences?”. In the introduction it was explained that a succesful strategy is comprised of two substrategies: the first strategy to cut costs and the second strategy to lever the available resources in business aspects where they render more growth. With respect to the cost-cutting strategy two possible strategies were analyzed, as preliminary research identified these strategies to have most potential of success. These strategies were about reducing wages of employees and cutting suppliers’ margins. It can be concluded that ASDA could best adopt the strategy of reducing its suppliers’ margins if a decision was to be made at this moment. Reducing the cost of wages 33
is not a viable strategy yet as it needs to be explored further, especially regarding the effects the strategy can have on the relation that ASDA has with its employees. The uncertainty about this conclusion is mostly in the preference ranking as this formed the basis for identifying this conclusion (through the conflict analysis method). Further research into the preference ranking is thus recommended. ASDA’s social network did show that putting pressure on the suppliers could have potentially big consequences if pushed too far as important connections to bridging actors could get broken. It is therefore recommended to ASDA to keep monitoring the relations with the suppliers to determine how far they can be pushed. With respect to the strategy of growth it can be concluded that the dominant strategy is the scenario in which ASDA increases its product diversity and its competitors do not. Taking into account the actions of all other actors, this would thus be the best strategy for ASDA if a decision was to be made now. The uncertainty in this conclusion is in the payoff function (used in the game theory) and further investigating thereof is recommended. The social network visualized the shift of customer base that an increased product diversity would result in, which is mostly towards the middle class customers.
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References Banerji, S. et al., 2009, Cut Costs, Grow Stronger. Retrieved from http://www.strategybusiness.com/article/00001?pg=all Blinston, A., 2014, October 7, Why Was Buffet Wrong on TESCO? Retrieved from https://investingsidekick.com/buffett-wrong-tesco/ Erickson, J., 2014, September 24, The Middle-Class Squeeze: A picture of Stagnnt Incomes, Rising Costs and What we can do to Strangthen America’s Middle Class. Center for American Progress. Retrieved from https://www.americanprogress.org/issues/economy/report/2014/09/24/96903/the-middle-classsqueeze/ Gye, H., 2013, February 4, Supermarkets can sell mince which is less than 50% meat after Government asks to opt out from new EU rules, Dailymail. Retrieved from http://www.dailymail.co.uk/news/article2273141/Supermarkets-sell-mince-50-meat-Government-asks-opt-new-EU-rules.html Hermans, L. and Bots, P., 2002, Metagames: Exploring Participatory Stakeholder Analysis for Water Management in Egypt, Simulation-games for research learning and intervention, Eburon Academic Publishers, Delft, p. 205-224. Hermans, L. M. and Thissen, W. A. H., 2009, Actor analysis methods and their use for public policy analysts, European Journal of Operational Research, p. 808-817. Hipwell, D. and Knowles, T., 2015, January 10, Tesco’s supermarket cost-cutting threatens thousands of new jobs, The Times. Retrieved from http://www.thetimes.co.uk/tto/business/industries/retailing/article4319273.ece Howard, N., 1971, Paradoxes of Rationality: Theory of Metagames and Political Behaviour, The MIT Press, Cambridge, Massachusetts. Iyengar, S. S. and Lepper, M. R., 2000, Personality Processes and Individual Differences. Journal of Personality and Social Psychology, p. 995-1006. Myerson, R. B., 1991, Game Theory: Analysis of Conflict, Harvard University Press, p. 1-2, Chapter 1. Nicholson, C., 2012, The relationship between supermarkets and suppliers: What are the implications for consumers?, Consumers International. Office Of National Statistics, 2014, Retail Sales. Retrieved from http://www.ons.gov.uk/ons/dcp171778_377638.pdf Rankin, J., 2013, December 4, What’s Gone Wrong with Tesco, The Guardian. Retrieved from http://www.theguardian.com/business/2013/dec/04/tesco-whats-gone-wrong-uk-largest-supermarket Rasmusen, E., 2007, Games and Information: An Introduction to Game Theory, Blackwell Publishers. Seely, A., 2014, The UK Competition Regime, House of Commons Library, Business & Transport Section. Shaw, K., 2005, ASDA WAL-MART: The Alternative Report, War on Want. Schelling, T., 2010, Game Theory: a Practitioner’s Approach, Economics and Philosophy, p 27-46.
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Simms, A., 2014, September 22, Tesco: Why did it go so wrong?, The Guardian. Retrieved from http://www.theguardian.com/commentisfree/2014/sep/22/tesco-pursuit-of-profit-britains-biggestsupermarket Smithers, R., 2013, October 16, Tesco to give surplus fresh food to FareShare to help charities, The Guardian. Retrieved from http://www.theguardian.com/environment/2013/oct/16/tesco-surplus-foodbanks-fareshare-charities Smithers, R., 2013, October 21, UK supermarkets face mounting pressure to cut food waste, The Guardian. Retrieved from http://www.theguardian.com/business/2013/oct/21/uk-supermarkets-pressure-cut-foodwaste Wal-Mart Stores, 2013, Walmart Annual Report. Retrieved from http://cdn.corporate.walmart.com/66/e5/9ff9a87445949173fde56316ac5f/2014-annual-report.pdf 2014, August 15, UK economic growth revised up to 3.2%, BBC. Retrieved from http://www.bbc.com/news/business-28800141 2014, November 11, UK Supermarkets (Market Share 2013-2014), Grocery News. Retrieved from http://grocerynews.org/2012-06-16-08-27-26/supermarkets-market-share/grocery-stores 2015, January 13, Sainsbury's to cut 500 support jobs in cost cut push, BBC. Retrieved from http://www.bbc.com/news/business-30799099
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Appendix A. Retail sales growth This appendix presents the past rend for the retail sales in the UK.
Figure A1 - All retailing seasonally adjusted sales volume and values. Source: Office for National Statistics, 2014.
Elucidations on and conclusion from this figure (Office for National Statistics, 2014): In the period between 2007 and 2012 the sales volume stayed about even while the volume significantly increased; In August 2014, the quantity bought in the retail industry (volume) increased by 3,9% compared to August 2013; The revenue increased by 2,7%; In August 2014, non-seasonally adjusted data shows that the prices of goods sold in the retail industry (as measured by the implied price deflator) decreased by 1.2%.
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Appendix B. Stakeholder analysis Appendix B.1
Formal Chart
This appendix presents the formal chart of the stakeholders.
Figure B1 - Stakeholder analysis: formal chart.
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Appendix B.2
Determining the interests, objectives and problem perceptions of actors
The table below shows the list of actors that are involved in the UK market share competition issue. The table consists of: • • • • • •
Actors: consists of actors' name; Interest: actors' general interest; Desired situation/objectives: objectives they want to achieve in the issue; Existing or expected gaps: what condition is preventing them from achieving their objectives; Causes: what is causing the gaps; Possible solutions: what can the actors do to overcome the gaps.
Actors
ASDA
Tesco
Sainsbury’s
Morrisons
Interests
Desired situation/ objectives
Existing or expected gaps
Causes
Possible solutions
Food, clothing and general merchandise retail.
High stock value, increase of profits, increase of market share, become the market leader
With 17.2% of market share it is the 2nd leading supermarket in UK1, has been experiencing a stagnated growth in the last years which is feared to continue
Families’ budgets are under pressure, lower pricing strategy didn’t work, increase of competition and regulation
Expand the excellence of its leading lines (fish, meat and confectionery) to other groups of products, expansion activities to catch more customers
Food, clothing and general merchandise retail
High stock value, increase of profits, increase the market share gap to its competitors
With 30 % of market share it is the market leader, declining profits and stock value, decreasing market share
Big focus of resources and efforts in international expansion, offers a wide set of products2, investment in physical shops3
Give more attention to its main market (UK market), reduce the range of products offered, invest in its online segment
Food, clothing and general merchandise retail
High stock value, increase of profits, increase of market share, become the market leader
With 16.2% of market share it is the 3rd leading supermarket in UKError! Bookmark not defined., has been experiencing a stagnated growth in the last years
Big enough to compete with the other players in price but not big enough to surpass them, increased the variety of products sold too late
Focus on having clear offers to its customers, offer a more articulated value proposition
Food, clothing and general
High stock value, increase of profits, increase of
With 12,1% of market share it is the 4th leading supermarket in
Recently lost a price war with its direct competitors for the basic needs products, slow entry to
Compete in product quality instead of price, target a market
1
Nicholson (2011), p.4. Theguardian.com (2014a). 3 Theguardian.com (2014b). 2
39
Waitrose, Aldi & Lidl
Small supermarkets & grocery stores
Consumers
Employees
Suppliers
merchandise retail
market share, become the market leader
UK, has been experiencing a stagnated growth in the last years
the online segment (only this year)
segment accordingly, develop the online service
Food, clothing and general merchandise retail
High stock value for shareholders, increase of profits, increase of market share
They have a market share of 5.2%, 4.8% and 3.5% respectively, their market share is increasing significantly more than the market share of the main supermarkets
Are winning the price war by far, do not buy from top brand suppliers, are targeting the low and middle classes, high employees’ productivity
Intensive marketing focus on the low and middle classes in order to grow even more
Food and general merchandise
Increase profits in order to expand their business, become more competitive
The existence of big supermarkets prevents the expansion of the smaller ones, many can go out of business
Bigger supermarkets have access to economies of scale and scope (lower costs and more diversity of products)
Improve product quality, improve customer service performance, maintain loyal customers, associate with other small establishments
Maximize their utility (dependent on product quality, cost, time and experience)
High product quality, cheap products, good service, convenient shop location
Diversified offer from many supermarkets can make the decision making more difficult, not easy to find the “cheaper product”
Cheap supermarkets have worst locations (outskirts of cities and towns), big competition for people’s loyalty
Support local independent retailers and keep an eye on local planning proposals to ensure retail developments, make a full environmental, economic and social impact assessment
Salary, career development, job fulfilment
High salary, security of employment, good working conditions, good career development programs
The dimension of the supermarkets is not proportional to the amount of created jobs, resistance to career development (big companies), low salaries
Supermarkets efficiency in terms of employees (employ only 50% more people than local stores)
Improve labour conditions, appeal to the workers' union, applications for professional development programs
Production and distribution of goods
Increase product margins, expand their business, increase profits
Pressure to decrease product margins, the average collection period is much bigger than the average payment period, retailer's house brand competition
Retailer competition forces them to reduce their margins, the winner is the one with the cheapest price and the loser suffers with unsold items
Propose more added values, improve the rule in the contract with retailers, appeal to a strong regulation
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Environmentalists
Environmental protection, animal protection, bioproducts
Decrease the amount of pollution, development of animal rights, increase the amount of bio-products in supermarkets
Every year millions of tons of food is wasted4, animals continue to be badly treated in the food industry, bio-products are still a minimal percentage of the products sold
People tend to buy more than what they need, (i.a. caused by supermarkets’ multi-buy deals and other marketing tools), bioproducts high prices, minimization of costs
Help supermarkets to spread their soon to be expired food to charities5, appeal for more animal protection laws, advertise bio-products
Department for environment, food and rural affairs
Environment, food production
Development of a sustainable food sector including animal health and welfare
Now and then some animal related disease appears in the food sector, animal health is not always guaranteed
To lower costs the supermarkets cut on animal health and welfare as well as the quality of the food6
Regulations have to be implemented to guarantee animal welfare and the quality of food
Competition and markets authority (government)
Regulation, market competition
Prevent and reduce anticompetitive activities, prevent the occurrence of cartels
This market is a clear oligopoly and so needs strong regulation activities
Retailers tend to win the market, application of a winlose strategy that is not beneficial for other parties
Have more watchdogs and apply stricter rules and punishments
Efficient and sustainable national economy
Increase UK economic growth, increase the country’s GDP, increase the buying power of people
UK has a strong economy, has been experiencing a positive economic growth since 2009, its actual value is above 3% per year7
Big supermarkets are opening new stores in rural areas, small supermarkets and grocery stores cannot compete with them
Boost local stores, give subsidies to increase the small businesses development, differential taxes policies
Labour's right
Higher salary for employees, better working environment, safety, facility and benefits for employees
Sometimes the working environment or their salary is not good for employees' safety or for a good productivity
Companies have their own policies regarding money spending, which can lead them to pay only the minimum wage
Dialog with companies to improve employees’ working conditions. Report situations of bad working conditions
Department of economic affairs
Britain's General Union8
Table B1 - Stakeholder analysis: determining the interests, objectives and problem perceptions of actors.
4
Theguardian.com (2014c) http://www.theguardian.com/business/2013/oct/21/uk-supermarkets-pressure-cut-food-waste Theguardian.com (2014d) http://www.theguardian.com/environment/2013/oct/16/tesco-surplus-food-banks-fareshare-charities 6 Dailymail.co.uk (2014) http://www.dailymail.co.uk/news/article-2273141/Supermarkets-sell-mince-50-meat-Government-asks-opt-new-EU-rules.html 7 BBC.com (2014) http://www.bbc.com/news/business-28800141 8 Gmb.org.uk (2014) 5
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Appendix B.3
Interdependencies table Interdependency Table Dedicated actors Critical actors
Similar/ supportive interest and objectives
Employees (conflicting objectives regarding wages, but supportive interests with respect to job security)
Conflicting interest and objectives
Consumers, suppliers Tesco, Sainsbury’s, Morrisons
Non-critical actors
Non-dedicated actors Critical actors
Non-critical actors Department of Economic Affairs
Waitrose, Aldi, Lidl, small supermarkets and grocery stores, environmentalists, Britain's General Union (GMB)
Competition and Markets Authority (government)
Department for Environment, Food and Rural Affairs
Table B2 - Stakeholders analysis: interdependencies table.
Elucidations on this table: TESCO - Forms a critical actor due to its leading market share. They have conflicting interests with respect to ASDA because they both compete for a higher market share. Sainsburry, Morrison - Critical actors because they also have big market shares. They would compete with ASDA to get more market share.
Waitrose, Aldi, Lidl, small supermarkets and grocery stores - Not critical actors because their market shares are relatively low compared to ASDA´s. Even if they would want to compete, their powers are not really significant.
Consumers - are considered as critical actors because they facilitate ASDA’s goal of an increase in market share. If the consumers decide to block ASDA it will prevent ASDA from increasing its market share. The interests of the two actors conflict because ASDA desires high prices and the consumers desire low prices. Employees - are considered as critical actors because they are assumed to be non-replaceable by other actors (or e.g. machinery) and have blocking power through i.a. strikes. Note that this actor represents all employees in one group (e.g. a labour/employee union) and not individual employees. Suppliers - are considered as critical actors because they are assumed to be non-replaceable by other actors very easily (ASDA cannot create its own supply chain within a reasonable period of time) and they have blocking power through i.a. strikes. Note that this actor represents all suppliers in one group (e.g. a labour union) and not individual suppliers. Environmentalists - are considered as non-critical actors as they are not assumed to have blocking power. Potential media campaigns and other actions can influence the consumers their opinion, but even if this is considered a blocking power it is based on the blocking power of the consumers (and not the environmentalists). The interests of the environmentalists clash with those of ASDA, because ASDA places (in general) economic values over animal welfare (to a certain threshold). Department for environment, food and rural affairs, Competition and markets authority - is considered as a critical actor because they are assumed to have blocking power through their formal power position of creating regulations and laws. The department is considered to be non-dedicated because they will only use their powers when they feel it is necessary, hence when certain values are 42
affected or damaged too a certain extend. They don’t seek to play an active role, but will only when needed. Department of economic affairs - is considered as a non-critical actor because they are not considered to have direct regulatory power (only indirect through i.a. the Competition and markets authority). The ministry is considered to be non-dedicated because they will only use their powers when they feel it is necessary, hence when certain values are affected.
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Appendix B.4
Important resources, resource dependency and replaceability
The table consists of: Important resources: formal and informal means that are available to the actors to realize their objectives; Replaceablity: if one actor’s resource can be replaced by another actor; Resource dependency: to what degree are the actors dependant on this actor’s resources; Critical actor: is this actor important based on its “power of realization” or “blocking power”? Critical actor?
Important resources Yes
Limited
Yes
Tesco
Know-how (they were e.g. first to use electronic checkouts), reputation, money, biggest market share.
Sainsbury’s
Reputation, money, market share.
Yes
Limited
Yes
Morrisons
Reputation, money and market share.
Yes
Limited
Yes
Waitrose, Aldi & Lidl Low price products, reputation.
Yes
Limited
No
Easy access for locals.
No (if we see them as individual shops, one can be replaced but never all of them).
Limited
No
Money, buying power.
No (if we see them as a whole, individual consumers can be replaced)
High
Yes
Manpower, experience, regarding working in a supermarket.
No (if we see them as a whole, individual employees can be replaced).
High
Yes
Supply stock, price control.
No (if we see them as a whole, individual employees can be replaced)
High
Yes
Influence to government regarding environmental issues.
Yes
Limited
No
Department for environment, food and rural affairs
Authority and formal power in food sector.
No
High
Yes
Competition and markets authority
Authority on regulating market competition.
No
High
Yes
Department of economic affairs
Authority on regulating market competition.
No
High
No
Britain's General Union (GMB)
Labour rights. Connection with the government.
No
Limited
No
Small supermarkets/ grocery stores
Consumers
Employees
Suppliers
Environmentalists
Replaceability
Resource dependency
Actors
Table B3 - important resources, resource dependency and replaceability.
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Appendix C. Non-qualified workers average salaries This appendix presents non-qualified workers' average salaries of the UK’s supermarkets. Actors
Shop Floor Assistant (€/hr)
Cashier (€/hr)
Average (€/hr)
ASDA
8,52
9,23
8.88 (3º)
Tesco
8,85
8,59
8.72 (5º)
Sainsbury’s
8,52
8,24
8.38 (7º)
Morrison’s
8,32
8,59
8.46 (6º)
Waitrose
8,76
8,98
8.87(4º)
Aldi
8,90
9,71
9.31 (1º)
Lidl
8,89
9,64
9.27 (2º)
Table C1 – Non-qualified workers’ average salaries of the UK’s supermarkets. Source: Glassdoor.com, 2014.
Elucidations on this table: The average salary for shop floor assistants is 8.68 € per hour. On the other side the average salary for cashiers is 9 € per hour. The higher salaries for cashiers are due to the higher responsibility they have for dealing with big quantities of money. ASDA is the company from the main four supermarkets that has been paying the higher salaries, closely followed by Tesco. Waitrose’s average salaries are very similar to ASDA’s. Aldi and Lidl are the actors that have been paying the bigger salaries by far, which can be translated in a bigger employee happiness and therefore an improved productivity. The focus is on non-qualified workers that have a significant impact near the customers. Changes in their productivity will directly affect the customer service performance. The minimum wage in UK is approximately 8,24 € per hour (Gov.uk, 2014). As it can be seen in Table C1 the salaries do not go much higher than this threshold. The companies that have been experiencing a bigger growth in the last years are also the ones that have been offering bigger salaries (e.g. Aldi and Lidl).
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Appendix D. The increasing trend of e-business The supermarket industry is undoubtedly changing, and one of the main causes is the growth of the ebusiness sector, as it can be seen in Figure D1.
Table D1 – UK internet sales as a % of total retail sales, monthly data, not seasonally adjusted. Source: Rhodes, 2014.
It is expected that by 2020 the e-commerce will capture 34% off the total retail sales. This increase will lead, on the other hand, to a decrease of 21% in retail space, and to a decrease of 31% in the number of shops (Rhodes, 2014). Logically, these numbers are a big motivation to reduce personnel costs, since less shops mean less jobs.
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Appendix E. Removing the infeasible scenarios from all the possible combinations of actions In this appendix, the infeasible scenarios will be removed from all the possible combinations of actions.
Table E1 - Removing the infeasible scenarios from all possible combinations of actions for the issue “Reducing Suppliers’ Margins”.
Elucidations on this table: All the scenarios inside the red boxes are considered infeasible. Scenario S2 is considered infeasible because ASDA’s Suppliers cannot accept new terms when ASDA does nothing, they only can accept new terms when ASDA effectively changes the terms. Scenario S3 is considered infeasible because it is assumed that ASDA’s Suppliers only change their business partner when ASDA reduces their margins over the products sold. In this case that does not happen, so it is infeasible for ASDA’s Suppliers to change their business partner to other than ASDA. Scenarios S4, S5 and S6 are considered infeasible because it is assumed that the Competition and Markets Authority only can supress the supermarkets actions when both ASDA and Main Competitors reduce their suppliers’ margins at the same time. In none of these scenarios this happens. The scenarios from S8 to S12 are infeasible for the same reasons that the scenarios from S2 to S6, respectively. 47
Scenario S13 is infeasible for the same reason that scenarios S4, S5 and S6, as well as scenarios S16, S17 and S18. Scenario S19 is infeasible because ASDA’s Suppliers do nothing when ASDA reduces their margins. Here, since the Competition and Markets Authority does not suppress supermarkets actions, ASDA’s Suppliers cannot do nothing, at least they have to accept the new terms. Scenario S21 is considered infeasible because it is assumed that ASDA’s Suppliers only change their business partners when ASDA reduces its suppliers’ margins and Main Competitors do not. In this case both ASDA and Main Competitors reduce their suppliers’ margins, and so ASDA’s Suppliers cannot change their business partners. Scenarios S23 and S24 are considered infeasible because it is assumed that ASDA’s Suppliers only accept new terms or change their business partners when the Competition and Markets Authority does not suppress supermarket’s actions (when both ASDA and Main Competitors reduce their supplier’s margins). In this case it does, and so ASDA’s suppliers should do nothing because the supermarkets actions have no effect on them.
Table E2 - Removing the infeasible scenarios from all possible combinations of actions for the issue “Reducing Wages Cost”.
Elucidations on this table: The scenarios inside the red boxes are considered infeasible because it is assumed that ASDA’s employees only reduce their productivity or engage in a strike when ASDA reduces their salaries or dismisses a number of workers. Since ASDA does not do any of these actions in those scenarios, it is not feasible for the workers to reduce their productivity or to engage in a strike.
48
Appendix F. Scenarios to be maintained Some scenarios should be maintained in order to draw the most appropriate conclusions: the status quo represents the situation as it was if nothing was done to change it, and so it is always the same during the analysis; the present scenario incorporates the actors’ moves in order to achieve their objectives; the positions of different stakeholders are the scenarios that comprise actors preferences, to which they would like others to agree to; compromises are scenarios in which two or more stakeholders give away their position in order to achieve a scenario that is better suitable to all; conflict points are scenarios that cause clash, good to force other actors to accept a determined position (Hermans and Bots, 2002).
49
Appendix G. Actors’ preferences over the actions Actors’ preferences over the actions for the issue “Reducing suppliers’ margins”: ASDA ASDA prefers reducing its suppliers’ margins rather than doing nothing because this way it can save costs. If it is manageable, ASDA will increase its profits and free money to invest into another areas, release resources that before were blocked to apply into other areas of business; ASDA prefers that its main competitors do nothing instead of reducing their suppliers’ margins too. This way ASDA can gain a competitive advantage over them. It will have extra money to invest whereas its competitors will not; ASDA logically prefers that the Competition and Markets Authority does nothing, that is, that it does not block its activities by considering them unfair competition. If it does, ASDA will have to pay huge fines for “bullying” the supermarkets; ASDA prefers that its suppliers accept the new terms when these are changed. The least preferable action, for ASDA, that its suppliers can do, is to change the supermarket with which they do business. This implies that some products will be out of ASDA’s shelters to be in some other supermarket. This can lead customers loyal to those products to stop buying in ASDA, to change supermarket too. Main Competitors ASDA’s main competitors prefer that ASDA does nothing instead of reducing its suppliers’ margins. This way the main competitors can gain a competitive advantage over ASDA. They will have extra money to invest whereas ASDA will not; ASDA’s main competitors prefer reducing their suppliers’ margins rather than doing nothing because this way they can save costs. If it is manageable, they will increase their profits and free money to invest into another areas, release resources that before were blocked to apply into other areas of business; ASDA’s main competitors logically prefer that the Competition and Markets Authority does nothing, that is, that it does not block their activities by considering them unfair competition. If it does, they will have to pay huge fines for “bullying” the supermarkets; ASDA’s main competitors prefer that ASDA’s suppliers change their business partner. This way ASDA may lose some customers for not having all the products they were looking for. By changing their business partner, ASDA’s suppliers will probably start doing business with its main competitors, which is good for them. Overall, a decrease in ASDA’s market share will probably mean an increase in theirs. After this, they would prefer that ASDA’s suppliers do nothing instead of accepting the new terms proposed by ASDA, since this will mean that ASDA was successful in reducing their costs over the products sold. Competition and Markets Authority The Competition and Markets Authority prefers that ASDA does not reduce its suppliers’ margins since this leads to a more competitive market; The Competition and Markets Authority prefers that ASDA’s main competitors do not reduce their suppliers’ margins since this leads to a more competitive market; The Competition and Markets Authority prefers to supress supermarket whenever possible, since this contributes to a more competitive market;
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The Competition and Markets Authority prefers that ASDA’s suppliers do nothing because that means that ASDA also did nothing. After this, it prefers that ASDA’s suppliers change business partner because this way they are fighting off a “bullying” activity and working towards a better competitive market. If ASDA’s Suppliers accept the new terms, it will mean a lost for the Competition and Markets Authority. ASDA’s Suppliers ASDA’s suppliers logically prefer that ASDA does not reduce their margins; ASDA’s suppliers prefer that ASDA’s main competitors do nothing too. If they do, ASDA can feel pushed to do the same and that will lead to lower margins for them; ASDA’s suppliers logically prefer that the Competition and Markets Authority block whatever suppliers’ margins reduction strategies supermarkets may engage in; ASDA’s suppliers prefer that everything stays the same, that they do not need to do anything. After this, they prefer to change the supermarket with which they do business instead of having to accept the lower margins they are faced with. They will have some bureaucratic work to change their business partner, but their margins will stay the same. Actors’ preferences over the actions for the issue “Reducing Wages Cost”: ASDA ASDA wants to save costs with its workers. It can do that by reducing their salaries or by dismissing a determined number of workers. For ASDA both this actions have the same weight since what matters is their purpose; ASDA prefers that its main competitors do nothing instead of reducing their wages costs too. This way ASDA can gain a competitive advantage over them. It will have extra money to invest whereas its competitors will not; ASDA prefers that the employees’ coalition does nothing and understands its position. Moreover, ASDA prefers that they protest by reducing their productivity rather than by engaging in a strike, since this last measure will lead to a reduction in sales and to bad publicity. Main Competitors ASDA’s main competitors prefer that ASDA does nothing instead of reducing its wages cost. This way they can gain a competitive advantage over ASDA. They will have extra money to invest whereas ASDA will not; ASDA’s main competitors prefer reducing their wages cost rather than doing nothing because this way they can save costs. If it is manageable, they will increase their profits and free money to invest into another areas, release resources that before were blocked to apply into other areas of business; ASDA’s main competitors prefer that the employees’ coalition engages in a strike against ASDA. After this, they prefer that they reduce productivity. As fierce competitors, they always prefer the actions that can “hurt” their opponents more, that is, that can “hurt” ASDA more. Employees’ Coalition The employees’ coalition logically prefers that ASDA does not reduce its employees’ salaries or dismisses any workers since it affects them directly; The employees’ coalition prefers that ASDA’s main competitors do nothing too. If they do, ASDA can feel pushed to do the same and that will lead to negative consequences for the employees;
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If ASDA reduces employees’ salaries or dismisses them, the employees’ coalition will prefer to engage in a strike because they know that that action will have a bigger impact on ASDA than reducing productivity. Since these two actions only happen when ASDA reduces employees’ salaries or dismisses workers, the actions have a bigger preference than the action “do nothing”, to serve as a mean of comparison for the cases where ASDA acts against them. When ASDA does nothing, the employees’ coalition also does nothing, which in reality is the action that they prefer more.
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Appendix H. Payoffs of the game model Resources This category intends to represent the “facilities” that every actors could have when taking up a specific strategy in the game. It comprises if the actors have or not any “past knowledge” about the nature of the strategy or if they have enough monetary resources in order to implement this action. Benefits This category represents the potential benefits that an actor could expect in a given scenario. Public Image Since the actors involved in the game are mainly supermarkets, the Public Image that an actors shows to their costumers is very important. The model estimates that when an actor like LIDL (which normally sells low quality and cheap products) increases the quality of their offer, then it should increase the popularity of the brand. Risk This category intends to represent the risk that the implementation of a specific strategy might have. Completeness Actors are sometimes irrational, and despise the benefits or risk that the implementation of a strategy might result in, they still have their preferences of what they think is better for the company. This category intends to represent the irrationality of the actors. To quantify the outcomes in each of the presented fields of interest in the game, an ordinal scale from -3 to 3 has been considered. This ordinal scale in Table H1 intends to represent “how good” an outcome in one of the interests might be for an actor. Numerical outcome
Meaning
-3
Extremely Bad
-2
Very Bad
-1
Bad
0
Neutral
1
Good
2
Very Good
3
Extremely Good
Table H1 - Meaning of the numerical ordinal scale used for estimating the payoffs of the game.
Weights of the payoffs Even though the five actors of the game share the same interests (except for the Government), in reality it shouldn’t be expected that the actors involved in the game give the same importance to the five interest categories. To overcome the loss of reliability in the results of the game, different weights are used for every actor. To find the numerical outcome in every scenario of the game, multiplying the outcomes in each interest field with their respective weight and summing the results. In Error! Reference source not found. the weights of each interest are presented.
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Actors
Resources
Benefits
Public Image
Risk
Completeness
Tesco
0.15
0.20
0.30
0.25
0.10
ASDA
0.15
0.20
0.30
0.25
0.10
LCSM
0.25
0.20
0.15
0.35
0.05
S&M
0.15
0.20
0.20
0.35
0.10
Government
0,00
0.00
0.50
0.30
0.20
Table H2 - Weights of the interests.
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Appendix I.
Payoffs and scenarios of the game model
In order to estimate the payoffs of the game, it is needed to give a numerical value to every interest category (Resources, Benefits, Public Image, Risk and Completeness) for every scenario that could occur in the game. In Figure I2, Figure I3 and Figure I4 the estimation of each interest category is presented for every scenario of the game model. In Figure I1 it is indicated how to interpret the indicated values for every scenario:
Table I1 – Interpretation of the scenarios of the game.
Please take into consideration that in Figure I4 the scenarios presented are only contemplating a situation in which the government wouldn’t get involved. The analysts of the project consider that an intromission of the government would only be justified to the public opinion, if four or three of the main supermarkets of the country decrease the their prices. It is expected that if all the main supermarkets cut their prices, a situation of unfair competition for the suppliers of the supermarkets might occur. In the last case the public opinion would be favourable to accept the regulation of low prices. In order to model the involvement of the government through regulations of low prices, the model gives a negative payoff to the government if it decides to regulate low prices in an unjustified situation and a positive one if the regulation might be justified (more than three supermarkets reduce their prices). Of course if the government regulates low prices the supermarkets that decided to decrease their prices get a negative payoff based on the risk that the strategy had for them.
55
Possible scenarios of the game if ASDA increases quality
Table I2 - Payoffs of the possible scenarios that could ocurr if ASDA increases the quality of their products.
56
Possible scenarios of the game if ASDA increases diversity
Table I3 - Payoffs of the possible scenarios that could ocurr if ASDA increases the diversity of their products.
57
Possible scenarios of the game if ASDA reduces the product prices
Table I4 - Payoffs of the possible scenarios that could ocurr if ASDA reduces the price of their products.
58
Appendix J.
Complete game theory model
Complete game theory model in its extensive form
Figure J1 - Game model shown in its extensive form. ASDA actions (blue), Tesco actions (red), Sainbury's and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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Submodel: ASDA increases the quality of its products
Figure J2 - Game model shown in its extensive form. ASDA increases product quality scenarios. ASDA actions (blue), Tesco actions (red), Sainsbury’s and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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Submodel without dominated strategies: ASDA increases the quality of its products
Figure J3 - Submodel without dominated strategies. ASDA increases product quality scenarios. ASDA actions (blue), Tesco actions (red), Sainsbury’s and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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Submodel: ASDA increases the diversity of its products
Figure J4 - Game model shown in its extensive form. ASDA increases product diversity scenarios. ASDA actions (blue), Tesco actions (red), Sainsbury’s and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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Submodel without dominated strategies: ASDA increases the diversity of its products
Figure J5 - Submodel without dominated strategies. ASDA increases product diversity scenarios. ASDA actions (blue), Tesco actions (red), Sainsbury’s and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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Submodel: ASDA reduces the price of its products
Figure J6 - Game model shown in its extensive form. ASDA decreases the price of its products scenarios. ASDA actions (blue), Tesco actions (red), Sainsbury’s and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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Submodel without dominated strategies: ASDA decreases the price of its products
Figure J7 - Submodel without dominated strategies. ASDA decreases the price of its products scenarios. ASDA actions (blue), Tesco actions (red), Sainsbury’s and Morrisons coalition actions (orange), low cost supermarkets coalition actions (green) and government actions (black).
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