Strategy and Structure

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1 Whole Foods Market Strategy and Structure Jawaher Alotaibi June 18, 2015

2 WFM s Environment Whole Foods Market (WFM) is a natural and organic supermarket that it s known for healthy and natural food products. WFM took it upon itself to provide the highest quality of products because of the emphasis on the importance of eating organic and natural food. The environment in which WFM operates can be divided into three essential group of factors; economic factors, social factors, and political and legal factors. Besides, these factors should be considered in the structure that the company would embrace. Economic Factors: WFM provides products to healthy people targeting families with extra income to afford the organic and natural product price tags. Therefore, the main economic factor is income which means that any increase in income, would increase the customers purchase power which leads to an increase in demand, and vice versa. This situation can be illustrated by mentioning the decline in customers purchasing power when many people lost their jobs after the financial crisis in In short, the unemployment rate and short of money to spend become an issue for the luxury of organic products and the well-being of the company. WFM s stock has remained relatively constant over the last year. Social Factors: As it was mentioned before, there is an increase in people awareness about healthy food which means that there will be an increase in demand along with the increase desire to natural food. Organic Food is the new trend. In addition, more grocery stores are trying to relocate themselves in different parts of cities instead of rural areas, so the shifting from rural areas to urban areas is another big social factor since it involves with lifestyle that customers are living; people live in a rapid world where they want to find everything fast and because of that they want stores nearby them not 1

3 only in rural areas. As a result, competitor like Target has already shifted to smaller stores in big cities which means that WFM should do the same to adapt to this change in customers preferences. Political and Legal Factors: For a company that focuses on organic food like WFM, there is a system of rules and policies that it should follow to stay in the market; US Department of Agriculture (USDA) develops and implements these policies. So, the company does a lot of costly work to pass regular inspections and evaluations of processes in the company by USDA to be certified to sell organic food. The company is forced to take on higher costs to have government certification and approval which can affect WFM in terms of price. On the other hand, taxation at any level will always be a challenge to any company (USDA, 2015). By observing the previous factors, we can see that any change in these factors would lead to the complexity of the environment since complexity refers to the number of elements that can affect the environment if these elements changed. Grocery stores industry is characterized by being a high competitive industry because of the availability of many substitutes. Thus, WFM is keen to adapt to any change in its environment. On the other hand, the industry s rate of change isn t high which means that the change doesn t occur frequently even though there s different things that change every day in the industry but these things aren t vital to be considered. In brief, complexity of the environment would be the strongest challenge for WFM. Therefore, the company should apply a decentralized structure that helps the company to work in such industry; the company should operate more as an organic and less as a mechanistic entity to enhance its human force which represents the front line of the company. Nevertheless, WFM has adapted a divisional structure that means in every region, the team of management can take decisions immediately which is associated with the type of 2

4 environment in which WFM operates; decision can be made without reaching back to WFM s headquarter based on its importance. The company s structure was made to allow adapting to any change that arises suddenly. Definition of the Business Whole Foods Market, as a company works in grocery industry, is targeting customers that are educated with extra income and are aware of organic food importance, simply, WFM s customers want healthy food that its source is known which means the company has a scope of customers with one need to satisfy; natural and organic products. In order to fulfill this need, WFM stresses on providing its customers with the highest quality even if it means focusing on few product lines. The company labels everything about its products to different itself from other providers of organic products. Also, WFM has Eco-Friendly stores that are built with recycle products. Therefore, WFM applies a focus strategy that serves its market segment with the differentiation its segment of customer is looking for, which is healthy food (Porter, 1996). Evaluation of the Five Forces According to Porter s five force s model, the first force that shapes the competition is the threat of entry into the industry in which WFM works; the threat of entry is very low which means that new rivals couldn t enter the market easily. The reason behind that is the high cost that new entrants would face if they decided to be in the business. For example, the policies and rules that are hard to follow like the USDA certification which is needed to stay in the market is very costly. Also, it would be difficult to compete with a well-known brand like WFM which is considered one of leaders of the industry while new competitors are still marketing their new brand. However, if existing competitors like Walmart, and Target 3

5 decided to sell organic food only, it would be a real threat since they already have their place in the market as known brands (Porter, 2007). The Second force is the power of suppliers which is considered medium to high. The company is applying high quality standards which means that few suppliers can meet these standards. WFM usually deals with small farmers or producers in local areas who have the power upon the company. The biggest challenge of WFM with suppliers that to stop bigger suppliers from purchasing the smaller ones and control the prices; if this happened, it would lead to an increase in WFM s products due to the increase in the suppliers prices. The third force is the power of buyers which is low because customers are looking for healthy and organic food that isn t cheap comparing to regular food. So, the main factor here is the high quality of the food not the price; this means that customers wouldn t easily shift to another competitor if it provides products for a cheaper price. Customers aren t sensitive to price change. The forth force is the threat of substitutes which is very low because in the organic grocery stores industry, few companies have built their brand name which means that if a customer is buying from WFM, it s because this customer trusts WFM. So, nothing would make a customer shift to another company unless he or she doesn t want to buy organic food anymore. Loyalty is a strong barrier against substitute products. However, some customers might find their way to the small producers to buy directly from them. The last force is rivalry among existing competitors which is very strong. Existing competitors can offer organic food to expand their market share. Actually, organic food is the new trend which is attracting new companies to follow since it s expanding very fast. Thus, WFM is trying to acquire as much stores as it can to slow the competition. WFM has acquired four stores in 2014; as of September 28, 2014, WFM operates 399 stores (Whole Foods Market, 2014). 4

6 SWOT Analysis Strengths: WFM has a good relationship with the suppliers it deals with which is a big strength since it creates a long-term alignment and loyalty. There are thousands of variety of organic products that the company offers to its customers. WFM s stores were built uniquely with recycled products which proves WFM s commitment towards the environment. Strong employees empowerment is something that WFM is focusing on by giving each store s team the space to manage and direct activities by the team itself. WFM has a good brand recognition since it s the second biggest company in the industry with $14.64 billion of market capacity after Kroger. Weaknesses: The company has a slowing revenue with a cash flow statement that was negative by $100,000 by the end of WFM is focusing on high quality product which leads to high cost products as well. WFM depends on small producers and farmers in the industry who are just few, so it s a very risky situation. Opportunities: The increase of people awareness about healthy eating which increase the number of new potential customers; the trend of natural and organic food. There is a chance for WFM to expand its network of suppliers by working with local farmers in different regions. WFM can expanding its existing to new markets such as the online market and urban areas. 5

7 WFM can reduce the competition s intensity through opening and acquiring more stores. Threats: The shifting towards organic products might lead to oversaturation of the market. Bad economic conditions that could lead to increase in unemployment rate would affect the company s sales. WFM might lose its suppliers if customers decided to buy directly from the suppliers. Also, bigger suppliers may purchase small suppliers to have the control over the industry supply. Since big existing rivals can switch from selling non-organic products to organic product easily, it would be a serious threat because they have brand recognition as well. Any new policies and regulations can affect the company existence in the industry. Strengths Weight Weaknesses Weight - Good Suppliers Relationship - Variety of Organic Products - Unique Stores Design - Employees Empowerment - Brand Recognition Negative Cash Flow - High Cost Products - Depending on Few Suppliers Total 0.63 Total 0.37 Opportunities Weight Threats Weight - The Trend of Organic Food Oversaturation of the market Working with Local Farmers Economic Conditions Expansion to New Markets Losing Suppliers Acquiring More Stores Rivals Shifting to Organic Food New Regulations and Policies 0.05 Total 0.57 Total 0.43 From SWOT analysis, we can notice that the company s strengths outweigh its weaknesses while its opportunities outweigh its threats as well. This conclusion puts WFM in quadrant of strengths / opportunities (SO) which means that the company should focus on its 6

8 goals and implement strategies that makes the company takes advantage of its strengths and utilizes them wisely to obtain the best opportunities it have. Grand Strategy Whole Foods Market should pursue a combination of grand strategies that includes market development, product development, horizontal integration, and vertical integration. In fact, WFM has already implemented some of these strategies. For example, the company acquired six stores in 2013 that belonged to another company; WFM acquired another four stores in 2014 (Whole Foods Market, 2014); this example illustrates the horizontal integration that the company follows. In addition, as a vertical strategy, WFM has bought some of its small suppliers stores to insure supplies for the company and have some independency from the few suppliers in the industry. In 2014, the company opened 34 new stores in different locations to increase its distribution channels while its development costs of new locations was $447 million. Also, WFM concern about its products quality standards that results in spending millions of dollars on research and development in order to provide the best product; it has a strict standards that the company s suppliers should be aware of and apply, so WFM uses a product development strategy in addition to the previous grand strategies. Dynamic of the Strategy Process From my reading and analysis, WFM s strategy process isn t subject to any of Mintzberg s fallacies. In fact, the company s strategy consist of the management s understanding of WFM s environment and who it s unstable; especially during any strategy development. Also, the strategy clarifies how things should be done and why with some flexibility to give employees a better understanding about the work process. An evidence of the dynamic of WFM s strategy process is the decentralization of making a decision based on 7

9 the situation s circumstances; store s team as authorized employees to manage stores is another evidence (Mintzberg, 1994). WFM isn t tied to its strategy completely; the company is trying to discover more things to do to be unique while pleasing its customers through new products. So, the strategy isn t a permanent one since it can adapt new changes easily. WFM encourages it employees to speak up and give feedback to insure its strategy is beneficial. Anyone can help in developing the strategy (Hamel, 1996). 8

10 References Hamel, G. (1996). Strategy as Revolution. Harvard University School. Boston, MA: Harvard Business. Mintzberg, H. (1994). The Fall and Rise of Strategic Planning. Harvard University School. Boston, MA: Harvard Business. Porter, M. E. (1996). What Is Strategy? Harvard University School. Boston, MA: Harvard Business. Porter, M. E. (2007). The Five Competitive Forces That Shape Strategy. Harvard University. Boston, MA: Harvard Business School. United States Department of Agriculture. (2015). National Organic Program. Retrieved from Whole Foods Market. (2015). Whole Foods Market. Annual Stakeholders' Report 2014: Form 10-K. Retrieved from 9

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