Ocado is one among the top most online grocery supermarkets in United Kingdom. It does not have many physical stores but operates through an internet and deliver orders to people at their home. The Ocado has the best online infrastructure and offering services to customers in United Kingdom. This assignment is based on strategic review of the company Ocado. It discuss about internal and external factors and conduct Porter’s Five Analysis, Industry lifecycle, PESTLE analysis, Strategic group and SWOT analysis to determine the actual standing of the company in the market. In the later section, future recommendations have been conducted through TOWS and Ansoff Matrix. The analysis found that the Ocado is growing to be the most efficient online grocery supermarket. However, the company needs to focus on expanding warehouse network so as to target more number of customers.
Ocado is the only dedicated online supermarket of the UK and the world’s largest online food retailer. The company was founded by Goldman Sachs Merchant former bankers, Tim Steiner, Jason Gissing, and Jonathan Faiman. The company started trading by making partnership with Waitrose and ran all parts of the business themselves. The company made its first commercial delivery in the year 2002. In year 2010, the company made records in London Stock Exchange. Currently, it has headquarters in Hertfordshire and Hatfield.
The company gradually advanced towards incorporating advanced technology to the infrastructure. In year 2009, the company launched first app for the iPhone named “Ocado on the go”. This app provided chance to the customers to shop by means of their iPhone without a need of PC. This facility was extended for android users also in year 2010. Recently, in year 2013, the company became the official food supplier for the Big Brother House.
Ocado deals in their own grocery products from Waitrose supermarket chain and other branded products including flowers, magazines, and toys. There is no such physical shops but operates all through internet. The company has a large range of products to offer and currently it sells over 21000 products .
The company is partly owned by John Lewis Pension Fund and has a contract with Waitrose. Being a partner of Waitrose, the quality of products is of high class. In year 2012, the company made revenue of £678.6 million and with net income of £2.4 million. Currently, it employs more than 5,256 employees.
Currently, the company is enjoying the largest market share in online grocery selling business but in order to maintain this position, it would have to face several challenges and risks like competing with the new entrants and top retailers incorporating technology to their infrastructure.
2.1 Industry lifecycle
Industry Lifecycle refers to different stages that an industry goes through i.e. from first product entry to final decline. There are specifically five stages in industry lifecycle including early stages phase, innovation phase, shakeout phase, maturity, and decline phase.
Early stages phase includes product designing and positioning. The range and boundaries of the industry are established. During the innovation phase, product innovation declines and process innovation starts and dominant design is arrived. The companies adopt the dominant design and economies of scale are attained in the shakeout phase. During the maturity phase, market share and the cash flow is the main focus of the companies and in the last phase, the company is replaced by a new one is case of revenues declining.
The early phase of the Ocado started off in year 2000. It grew till year 2006 and then reached at the maturity phase. During the era 2008 to 2010, it reached in phase of maturity and started declining. Following chart demonstrates the industry life cycle of Ocado.
2.2 Porter’s Five Forces
Porter’s five forces deal with the factors that may influence the company’s growth. The external environment is called as macro environment and the internal as micro environment. Porter’s five forces model conducts an analysis of the external and internal environment so as to assess the level of competition and design strategies to effectively compete in the marketplace. The five competition forces that may impact the organizational growth are as follows;
- Competition between the existing players in the market
- The force exerted by customers
- Impact of suppliers on the dealers
- Threats of new entrants in the market
- Threats of substitute products introduced in the market
In case of Ocado, the company is facing four of the Porter’s five forces i.e. rivalry between the market players, suppliers and customers, and new entrants. First the traditional companies of groceries are also heading towards the technological applications like Sainsbury, Tesco, and Albertson. These competitors are also introducing e business and expanding their distribution channel like Ocado. Secondly, most of the customers are still limited to proximity shops. Third, there are multiple suppliers so new entrants have various options and can avail services of any. Fourth, the agreement with Waitrose will soon be expired and that also call a big threat for the organization.
In order to compete with the market rivals and other forces, Ocado is currently focusing on lowering the prices of the products and is also offering various deals to attract more number of customers. It has also introduced various apps for the ease of customers. It has provided customers with methods to easily and quickly purchase items and get them delivered at their home. Considering the strategies of the company, it falls under cost leadership category.
PESTLE analysis is originally known as PEST analysis. This analysis technique is used to study the impact of external factors on an organization. PESTLE studies factors from six different approaches i.e. political, economic, social, technological, legal, and environmental factors. Political factors impact organizations mainly due to governmental regulations and legal matters including tax policies, trade restrictions, employment and labor laws, environmental regulations, political stability, tariffs, and trade restrictions. Economic factors usually leave an impact on the decision making and business operations of the organization. These include interest rates, inflation rate, and economic growth. Social factors refer to demographic and cultural aspects of the environment including age distribution, emphasis on safety and so on. Technological factors mainly affect the quality and cost of output and legal factors affects the cost, company operations, and demand of products. Environmental factors refer to the climate and weather changes of the location that affect the customers’ attitudes and company operations .
This section will discuss PESTLE analysis of the Ocado. It will highlight various factors that can affect the growth, operations or attitudes of customers.
The Governmental regulations regarding the online retail operations, and changes in the consumer protection laws, and licensing tax policies can affect the growth of the organization and can also affect on the net profit. If the Government imposes high tax rates then it would increase the prices and so the demand of products.
The economic factors can also raise the prices of products. Change in exchange rates, rise and fall or currency and depreciation determines the prices of raw material used for daily operations i.e. petrol prices that are to be used in trucks.
- Fluctuating Commodity Rates
An increase in the prices of commodities due to increase in price of commodities by suppliers will decrease the demand of products and will leave an impact in the long run.
- Interest Rates / Bank Charges
Interest rates and bank charges affects the prices of the products as it determines the expenses, company makes for the warehouse, machinery and vehicles.
- UK and World Economic Condition
The purchasing power of the customers is mainly decided through the World and specifically UK economic conditions. If there is a recession boom in UK, then it will affect the purchasing power of customers and so the sale of products.
It is important to maintain friendly relationship with employees as human resource is the most important asset of an organization. Labor laws must be followed and work life agenda should be enforced. If not maintained then company would have to bear increase in turnover rate and so it will increase hiring and training costs.
- Online Retail Industry Risk
Since, every other organization is now establishing an online retail industry so it could be a big threat for Ocado in future. Many traditional organizations like Sainsbury, Albertson, and Tesco who already have a big market share have also taken technological measures to improve their sales, market share and customers.
- Relationship with Waitrose
There is sourcing agreement of Ocado with Waitrose. Ocado is mainly dependent on Waitrose for its 85% of all products. But the sourcing agreement is soon going to end and then the company would have to look for personnel to create or recreate their own product labels and also find suppliers. Secondly, if competitors get in charge of Ocado and then the sourcing contract is terminated then it would be obliged to pay £4m to the Waitrose. Thirdly, company would also have to make expenses on retention, hiring and management of new staff.
Internet based or online retail shops are yet not common and so customers are usually reluctant to purchase goods online. There are lots of IT related security frauds and scams over the internet and that make customers even more hesitant. This makes it difficult for the organization to retain the customers. Therefore, it is highly important for the organization to deploy the best payment and processing system. A single bug or a smallest issue in the system can hurt the image of the organization. The customers using bank accounts to purchase online will lose trust on the organization.
- Vehicles/ Machinery
The distribution channel of the Ocado is of main importance since it has to deliver the orders to the customers at their desired place. Therefore, it must be highly efficient and problem free. Vehicles and machinery needs maintenance after every few months to keep them running in perfect condition. It needs oil change, new tires and more carrying capacity for the loading of orders. Moreover, the company must update their website, and mobile apps to attract and retain customers.
Safety and health laws regarding the employees are highly important. A bit of negligence can harm the life of employees. However, besides the health of employees, it will also affect the reputation of the company.
- Product Safety
The company must strictly follow health and safety laws. The products must be fresh and have their expiry written on packaging. Moreover, the cleanliness must also be maintained. Meat, fish or chicken products must also have expiry date written on them. If cleanliness and health or safety laws are not maintained at any company then as per the laws, it will be charged. Moreover, the reputation of the organization will be highly affected.
Currently, Government has not yet specified any laws for IT systems, patents or copyrights so there are lots of opportunities of the new entrants. This will soon populate the market and toughen the competition.
The company receives funds or debt facility of bout £100m but if the agreement with Waitrose cancels then the debt facility will also be terminated.
Environmental factors are especially important in case of Ocado because it is the only ecommerce retail grocery store. The company has to deliver orders anywhere the customer demands. However, due to snow or rain fall, it may get difficult for the service man to deliver the orders. So in order to be in time environmental conditions are considered.
2.4 Strategic Group Analysis
Businesses that deals in similar type of products or services and target same segment of population are called as Strategic Group. The analysis of the businesses in the same strategic group is said as strategic group analysis. Orado, Tesco, Sainsbury’s, and Albertson lie in a same strategic group since they all are supermarkets and target huge segment of population ordering groceries to be delivered at home .
Tesco is one among the top supermarkets of British stores. As per the 2002 statistics, it had annual sales of £20 billion. Though, the start of Tesco was not so impressive but later it became the largest online grocer worldwide and revenue of £356 million per year. It has 250 outlets operating worldwide. Sainsbury is second largest supermarket of United Kingdom. It has 463 stores and during the year 2002, it had sales of £110 million through online ordering system. Albertson is also the second largest online grocery supermarket of United States. It has 2500 stores and $37.5billion of annual sales .
2.5 SWOT Analysis
SWOT Analysis refers to the structured method that evaluates strengths, weaknesses, opportunities and threats to any organization. This section analyzes the SWOT of Ocado.
- The UK environment suites the Ocado business
- Efficient services are provided
- Fresh and high quality products are available at low price
- Without Waitrose, the company is left with limited products range
- Future profitability is at risk
- New products and services can be introduced using the same name
- Businesses can also be established at new markets
- IT fraud and scams
- New and traditional competitors in the online business
- Increased costs
3.1 Value Chain
Value Chain refers to the model, how the businesses get inputs or raw material, add value to them by processing it and sell finished products. The primary activities are the ones that are related to developing and delivering the product. These include inbound logistics, operations, outbound logistics, marketing and sales, and services. Support activities are ones used to improve effectiveness and efficiency of the product. It includes procurement, human resource, technological development, and infrastructure .
- Inbound Logistics
Externally sourced materials are currently received through Waitrose at Ocado. It involves different tasks including developing, designing, and operating.
The prices of the products are set and delivered on request through online ordering system. The grocery market thus grows by introducing new variety and types of products.
- Outbound Logistics
Easy and quick shopping.
- Marketing and Sales
Deals and vouchers are being offered to increase the sales of the company. The home delivery option further improves reputation of an organization.
Huge distribution network maintains the delivery service and also keep in contact with the users through social network.
3.2 Valuable, Rarity, Inimitability and Non-substitutability or VRIN
VRIN determines the value of resources and is enough for the sustainable competitive advantage.
Recommendations for Future Development
Ansoff and TOWS Matrix analyzes the existing and new products and markets and determines the strengths of the company of which it can take benefit in the future and weaknesses which can be turned into opportunities.
4.1 Ansoff Matrix
4.2. TOWS Matrix
Ocado is growing in to world’s top online grocery supermarkets due to its strong hold on technology. However, the company now needs to focus more on expansion of warehouse network so as to target worldwide customers. It is the need of time to expand business worldwide and introduce new techniques as there is a big threat to the company because of its competitors and new entrants. If the company will not bring innovation and focus on expansion then competitors will soon take their place.
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