GROUP ASSIGNMENT 2: ENGINEERING THE VALUE CHAIN OCTOBER 12, 2016 GROUP 32 Quoc Thong Nguyen 11833833 Hoang Trong Nguyen 12166548 Nirav Patel 12632790Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 1 Table of Contents I. Executive Summary................................................................................................................3 II. Introduction.............................................................................................................................4 III. Value Chain Analysis .............................................................................................................4 1. Concept of Value Chain ........................................................................................................4 2. Woolworths value chain ........................................................................................................5 a. Primary Activities ...............................................................................................................6 b. Support Activities ...............................................................................................................7 IV. Optimisation Scenarios of Value Chain................................................................................8 1. Developing in global market .................................................................................................8 2. Optimizing the logistic system ..............................................................................................9 3. Boosting online sale and marketing ......................................................................................9 V. Scenarios Analysis.................................................................................................................10 A. Developing in global market ...............................................................................................10 1. Barriers to Entry ...................................................................................................................10 2. Bargaining Power of Suppliers ............................................................................................10 3. Bargaining Power of Customers ..........................................................................................10 4. Existence of Substitutes .......................................................................................................11 5. Intensity of Competition .......................................................................................................11 B. Optimizing the logistic system ............................................................................................11 1. Barriers to Entry ...................................................................................................................11 2. Bargaining Power of Suppliers ............................................................................................11 3. Bargaining Power of Customers ..........................................................................................12 4. Existence of Substitutes .......................................................................................................12 5. Intensity of Competition .......................................................................................................12 C. Boosting online sale and marketing ....................................................................................12 1. Barriers to Entry ...................................................................................................................12 2. Bargaining Power of Suppliers ............................................................................................12 3. Bargaining Power of Customers ..........................................................................................13Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 2 4. Existence of Substitutes .......................................................................................................13 5. Intensity of Competition .......................................................................................................13 Conclusion ....................................................................................................................................14 Reference List...............................................................................................................................15 List of Figure Figure 1. Porter’s Value Chain Diagram ........................................................................................ 5 Figure 2. Woolworths limited supply chain diagram...................................................................... 6 Figure 3. Simple supply chain system ............................................................................................ 9Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 3 I. Executive summary The key purpose of this report is that evaluating the value chain of Woolworths Limited which is known as one of best organisations in Australia. The Porter’s Value Chain analysis is used to describe the value chain of Woolworths Limited. The main aims in this report are: - By using the Porter’s value chain, describe and realize the background of Woolworths Organisation; - Find out and define three different scenarios that may optimise value chain of Woolworths Limited; - Evaluate three scenarios about the risks and advantages of this organisation by using Porters 5 Forces - Create the summary and conclusion that is drawn from this case study. The content of this report is concentrated to evaluate, analyse and optimise the value chain of Woolworths Limited. The information included in this research mainly depend on the Woolworths Limited’ official page, the organisation annual reports, some academic resources related to the value chain issues, some journals about the logistics and business strategy planning. The findings in this report are: - The description of the primary and support activities in the Woolworths Limited under Porter’s value chain diagram - Optimising this value chain based on three different scenerios: developing global market share, optimizing the logistics system and boosting online sale. - The analysis each scenerios based on the Porters 5 Forces: Potential entrants, bargaining power of suppliers, bargaining power of consumer, threat of substitutes and power of competition. - Analyse the benefit and risk of Woolworths Limited value chain.Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 4 II. Introduction Woolworths is Australia’s top retailer providing the best quality of consumer goods and services to the customer through distribution centre (DC). Woolworths provides different ranges of product such as food, home appliances, groceries and electronics items. In this competitive era, maintain top position is crucial for every organization. Hence, Woolworths aims to improve customer services, maintain product price compared to other competitors, enhance the quality of product and provide more product at one place. Foods of Woolworths are always fresh because of great link with Australian suppliers. Woolworths manages and locates their distribution centre to maintain a supply chain and supply product to the store without interruption. According to different types of product, managing and maintaining distribution centre is necessary to smooth flow of supply chain and fulfil the customer’s need. Woolworths uses various kinds of strategy to locate their distribution centre in a proper manner to customer get fresh product every time. Woolworths is not only a top retailer in Australia but also cheapest home brand compared to other brands. The quality of Woolworths product is similar to other brand but the cost are cheaper. Hence, sales and shares of Woolworths go high every day. However, last year Woolworths market sales and market share went down to its rival companies such as Coles and Aldi (MarketLine 2016a). Therefore this report try to analyse the reason and give solutions to solve their problem. III. Value chain analysis 1. Concept of Value Chain First of all, Michael Porter, author of “Competitive Advantage: Creating and Sustaining Superior Performance” book introduced the idea of supply value chain through this book in 1985. A value chain is a giant box that contains various activities which are common for the different organizations that create value for a different product and services (Porter 1985). Michael Porter divided a value chain into two separate activities (1) primary activities and (2) support activities (Porter 1985). The supply chain is a process to start with the raw material, adding value and ending with the delivered product. The main production of the organization, distribution services, andQuoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 5 output are important for the primary activities. Primary activities further divided into an inbound logistics, operations, outbound logistics, marketing and sales, and service (Porter 1985). According to author Wahyuni (2010) primary activities are not working efficiently if the support activities are not working relevant to primary activities. Solid infrastructure, human resource management, technology development, and procurement are sub-activities of the support activities (Porter 1985). The value of the product, service, and profit margin depend on support activities (Porter 1985). Any organization can manage their value chain and also boost their sales and make a profit to following the porter’s value chain. Figure 1. Porter’s Value Chain Diagram 2. Woolworths value chain Woolworths Limited has 916 stores in Australia, and it has various brands such as BIG W, Dan Murphy’s, Woolworths petrol, Thomas Dux and hotels (MarketLine 2016). Woolworths strongly focused on their food quality and liquor market (MarketLine 2016). However, there is also some error made by the organization such as an excessive dependency on the Australian market and as a result, reduce the quality of the product and product recall (MarketLine 2016).Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 6 Figure 2. Woolworths limited supply chain diagram There are several threats to lose the sales of the Woolworths; it has to follow alcohol regulation implemented by the Australian government and also reduce their sales because of rival companies. The principle of the Woolworths Limited is the core of the organization: “Each man, woman, and child want a convenient place where product are cheap” (Woolworths Limited n.d.a). The description of various activities by the organization is mentioned below. a) Primary activities  Inbound logistics: Woolworths Limited is a top retailer company in Australia, and it has many suppliers. Woolworths distributes different product from their vendors and also produce their home brand products. Inbound logistics included to receiving products from suppliers or vendors to the distribution centre. The most important term in this process is to choose providers and, their product must be high quality to fulfil the customer needs at less cost (Woolworths Limited 2015).  Operations: There are some transformation activities proceed to develop output from input. Woolworths has their strategy to check the quality of the product and also maintain inventory according to demand. Woolworths Limited forecasts their sales and a demand of the product based on previous reports; and keeps its stocks relevant to demand.Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 7  Outbound logistics: Woolworths distribute their product from distribution centre to the store and make sure that the product must be fresh and good quality (Woolworths Limited 2015).  Marketing & sales: Woolworths sending more money on product promotion and it make successfully aware about new brands. Woolworths Limited forecast the demand of the product and weekly boosts their sales to reduce the price of the product (Woolworths Limited 2015).  Service: Woolworths provides a better customer service and refund policy to satisfy the customer. Woolworths also provides two different type of service to customers to reduce a waiting time on cash counter (Woolworths Limited 2015). b) Support Activities  Firm infrastructure: develop infrastructure for accounting, legal, administrative and general management help the organization to manage their daily operations.  Human resource management: Human resource is important for every organization to manage all activities on time and achieve a goal. Human resource management include recruits, hires, trains, motivates, rewards and dismissing its employees. Training and development of staff are very crucial and Woolworths invest approximately $32.2 million dollar (Woolworths Limited n.d.b).  Technology development: Development in technology is boon for the world. Woolworths use technology to maintain their resources, manage different activities and control their supply chain activities from supplier to distribution centre to store (Wahyuni 2010). Wahyuni (2010) said that, technology development also helps in reduce cost to implementation of transport management system.  Procurement: procurement is the heart of every retail company and Woolworths Limited is top retail company in Australia. Finding vendor, negotiate about price and maintain quality are important for the organization (Woolworths Limited 2015).Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 8 IV. Optimisation Scenarios of Value Chain Based on the Woolworths Limited 2016 annual report, the Woolworths market share decrease more than 1% from 38.3% in 2015 to 37.1% in 2016. Moreover, the earning of Woolworths in the financial year 2016 has also felt down with the change is 18% compared to the earning in 2015. The value chain is an essential factor that affects to this result. Therefore, optimising the Woolworths Limited value chain is an effective method to develop the rivalry and increase the revenue of Woolworths in the future. This report suggests three approaches should be applied to improve the current Woolworths value chain. The first method is the developing in global market. Secondly, the improving logistic system is also the efficient way. The last method is the developing of sale and marketing online. 1. Developing in global market Woolworths Limited takes the highest market share in the retail sector in Australia with more than 870 supermarkets operating in all the states in Australia and more than 150 supermarkets in New Zealand. Although Woolworths is the leading retailer in Australia and New Zealand, the global market share of Woolworths account for actually small proportion. Woolworths Limited currently can not reach to the international market where lots of powerful competitors over the world contribute to this market. If Woolworths is compared with other retailer such as Walmart, the Woolworths global market share is negligible. Within more than 3400 store in US and 4500 stores in South America, Africa and Asia, Walmart is the biggest retailer over the world (Basker, 2007). Expanding the company in the international market can bring some benefits. Richard (2006) supposed that entering to the global market place can help the business rise the sale and increase the profit. Beside that, the expanding of customer base globally is the chance for the company innovation their product and developing the marketing strategy. Moreover, entering to the global market can bring the brand value for the company. There are the reasons why Woolworths should be expanded the market globally: growth the sales; increase the profit or revenue; innovation their product; more customer and reputation of their brand name worldwide. The challenge of Woolworths when they enter to the international market place is implementing different entrance modes for different market places. Because of the differences between the religions and customer culture of each country, Woolworths should understand their customer culture before they run their business in those countries.Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 9 2. Optimising the logistic system Figure 3. Simple supply chain system Another method to develop the competition of Woolworths’s value chain and increase the profit is minimizing the logistic system cost. The price of each product includes the cost of logistic. Thus, if the logistics system is minimised the cost, the price of the product will be decreased as well. When the product is sold with the cheaper price, it will boost to the competition characteristic of Woolworths compared with other competitors. The product price is the essential factor which attract more customers come to Woolworths. The traditional method to distribute their product is shown on the figure 1. The goods after producing in the manufacture is delivered to the distribution center (DC) before it is distributed to the retailers. The customer will come to the retailer to buy their expect products. A modern concept of logistic system is the direct factory shipment. This method should be applied to minimise the cost of the logistic system. By using this method, products can be delivered from factory to the customer straight away and the distribution centre can be removed in the process. If Woolworths uses this method, they can save their money in the rent payment for distribution centre. Moreover, the cost and the time of transportation will be decreased because the delivery process does not require interchanging at the DC (Winkelkotte, 2011). In the next few years, with the developing of technology, the company can operate online to receive the order from the customer and distribute straight away from the factory to customer. This leads to reduce the number of retail stores and save the retail store operation cost. This approach can considerably decrease the cost of logistics and raise the profit of the company. 3. Boosting online sale and marketing Nowadays, the technology is developing so the rate of customer shopping online is increasing. Woolworths should be expanded their operation in online store. Woolworths has already presented their online services and released the Woolworths application in the mobile phone to simplify the customer’s online shopping process. Although online shopping progress makes up only 15% of the total profit, the chance for Woolworths to increase the profit in this market is actually high. It is required that Woolworths should invest in an effective online marketing strategy to boost onlineQuoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 10 sale. Social media contributes with the important and effective role in the online marketing that can be applied for targeted marketing to particular customer groups (Zhang, 2015). Although Woolworths enhanced social media strategy, the result of Woolworths’s social media marketing is still not effective. That is the reason why Woolworths should attract more customers through social media aspect and this is the best method to learn about how to change the customer favourite and taste. Moreover, social media is also a great approach for word of mouth marketing and tackle customer concerns. V. Scenarios Analysis: A. Developing in global market 1. Barrier to entry  Cultural difference is the big challenging part when expanding business to global market. To access to the customer in a new country, it is vital to learn a concrete understanding of new business environment before accessing to the new market.  Legal system is also an important aspect which need to be considered carefully before establishing business in the new country. The difference in tax system and government support 2. Bargaining Power of Suppliers  Expanding market is synonymous with variety choices of supplier. However, in some special type of local material, there are some monopolies who determine the price and trade policies can affect to the company.  In addition, the differentiation of input and the switching cost among supplier can pose considerable risks to the organization 3. Bargaining Power of Customers  Customer in different countries will have different shopping habits. Customer in poorer country tend to choose lower brands with cheaper price for saving while people in wealthier countries tend to choose medium brands to match with their life standard.Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 11 4. Existence of Substitutes  The risks come from substitute is considerable due to the performance and the changing cost. When replace a product by a new one, the supply chain process of that product will be changed more or less depend on the flexibility of the system. That is not mentioned to the cost will be changed in correspondence, which means cause a risk of financial stability. 5. Global Competition  To take part in global share, it is critical to aware of the intensity of global competition. There are many big retailers who have addressed their brand reputation on global extent such as Walmart, Costco or Kroger. Therefore, a long-term vision and a good business planning is very important for Woolworths to reach their targets on international market.  In addition, Woolworths need to take care the domestic rivals like Coles, Aldi also to not to be left behind on internal market B. Optimising the logistic system 1. Barrier to entry  The current system is being operating based on an old technology of logistic which cause loss the profit of Woolworths for many years. To tackle this problem, it is critical to make an investment on researching and developing new logistic technology to eliminate those cost. Although this change may affect to the normal operation of the company at the beginning, it will bring a huge advantage in the long-term.  Due to the special characteristics such as experience in retailer or understanding of Woolworths operation, there are not many providers can supply the suitable technology to the company. Thus, the cost of the solution can be high and not stable 2. Bargaining Power of Suppliers  In their operation, Woolworths cooperates with thousands of suppliers from domestic as well as foreign countries. Although their profit earned based on the reputation ofQuoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 12 Woolworths, they have the right to control their price on shelves if they built a good recognition in customer mind. 3. Bargaining Power of Customers  Logistic system of a company can determine how satisfied their customers are. The customer needs in logistic ability of Woolworths is in-time delivery and reasonable price. Therefore, it is necessary to find a solution to lower down the cost and time delivery for maintaining customer loyalty. 4. Existence of Substitutes  In the current value chain operation, any change in product will cause a lot of time waste for the system to suit with the new one. Therefore, a flexible and optimized logistic system is vital to adapt quickly when there are any substitution occurs. 5. Intensity of Competition  There are not many rivals in Australia retailer market except Coles and Aldi. However, the ability of emerging small retailers share customer is totally possible.  Moreover, online shopping is an emerging trend which can pose a high risk to Woolworths in holding their customer. Instead of going to retailer store for shopping, they can click and buy whatever they want via shopping website with a good logistic service. C. Boosting online sale and marketing 1. Barrier to entry  Using online channel is an emerging trend which bring benefit for both sides of producer and customer. It helps customer reduce their shopping time, easier to choose with a lot of options by just sitting in their house or anywhere by using their smart phones. However, for retailer side, logistic is the most significant barrier when using this method due to the delivery capacity and traffic problem. 2. Bargaining Power of SuppliersQuoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 13  Same as the two scenarios above, Suppliers now have many sale channels to access to their target customers and online media is one of those ways. When they have a good reputation in customer mind, it is difficult for retailers like Woolworths can control their price. 3. Bargaining Power of Customers  When customer use online method to buy product, the chance they choose Woolworths website to buy is smaller than traditional way. The reason is that they are distracted by many online advertising website which is more convenient to buy these day. Woolworths has to classify items which customer got familiar with buying at Woolworths stores, push advertising online by promotion programs to attract customer and change their habit when shopping online. 4. Existence of Substitutes  Using online channel is a big chance for Woolworths to try their substitute products without increasing stock capacity. Due to the limitation of stock capacity, it is difficult to sell similar product at the same time. The online shelves can solve this problem.  However, it is need to control product quality before introducing to customer. If they try to use substitute product and they do not feel satisfy about them, the chance to lost those customers is high. 5. Intensity of Competition  Due to the significant benefit online sale bring to retailers, the competitive is remarkably high in correspondence. Beside big retailers like Woolworths, Coles and Aldi, there are a big number of smaller retailers in Australia or even foreign retailer have a chance to share the retailer market via internet. If there is not continuously update or market trend research, Woolworths may lost their loyalty customer to their competitors.Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 14 VI. Conclusion: In general, this report aim to analyze a new angle of view on Woolworths value chain operation. Based on the Porter’s value chain analysis, we built three scenarios which can affect to Woolworths value chain system and then tackle them for improvement. In a vigorously changing time, it is vital to continuous review and update the system to catch the customer needs. Although customer is the main target for any company to aim, the importance of understanding suppliers and competitors is significance. Those understanding will help the company to have right policies and good direction for market reaction and flexible adaptation.Quoc Thong Nguyen - 11833833 Hoang Trong Nguyen - 12166548 GROUP 32 49680 VCES A16 NIrav Patel - 12632790 October 12, 2016 15 References: Basker, E. 2007, ‘The cause and consequences of Wal-Mart’s Growth’, Journals of economic perspectives, vol. 3, no. 3, pp. 177-198. MarketLine 2016, Food Retail in Australia, industry profile, viewed 10 Oct 2016, . Richard, P.B. 2013, ‘10 reasons to go international’, Atlantic International Growth Consultants, USA. Wahyuni, D. 2010, ‘The Importance of Supply Chain Management in Competitive Business: A Case Study on Woolworths’, Manajemen Usahawan Indonesia, vol. 1, no. 1, pp. 32-39. Winkelkotte, T. 2011, ‘Optimizing complex logistics systems with approximative consideration of short-term costs’, Computational logistics, vol. 6971, pp. 194-208. 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