An empirical investigation of supermarket differentiation

TABLE OF CONTENTS

Declaration and Word Count

Abstract

Acknowledgements

Contents Page

List of figures

CHAPTER 1 INTRODUCTION
1.1 Choice of the topic
1.2 Academic objectives of the dissertation
1.3 Outline of chapters

CHAPTER 2 SETTING THE SCENE

CHAPTER 3 LITERATURE REVIEW
3.1 Competitive advantage
3.1.1 Resource-based approach
3.1.2 Competitor-based approach
3.1.3 Customer-based approach
3.2 Strategic positioning, differentiation and customer perception
3.2.1 Strategic positioning
3.2.2 Types of differentiation
3.2.3 Strategic positioning and customer perceived value
3.3 Types of differentiation combined with retailing
3.3.1 Differentiation in retailing
3.3.2 Price differentiation
3.3.3 Image differentiation
3.3.4 Support differentiation
3.3.5 Quality differentiation
3.3.6 Design differentiation
3.3.7 Undifferentiation
3.3.8 Categorisation of differentiation

CHAPTER 4 METHODOLOGY
4.1 Research questions
4.2 Research methods
4.2.1 Research philosophy
4.2.2 Research approaches
4.2.3 Research strategies
4.2.3.1 Descriptive research
4.2.3.2 Survey
4.2.4 Time horizons
4.2.5 Data collection and analysis methods
4.2.5.1 Primary and secondary data
4.2.5.2 Qualitative and quantitative data
4.2.5.3 Interview
4.2.5.4 Sampling
4.2.5.5 Questionnaire design and methods of data analysis
4.3 Limitations and bias
4.4 Ethical issues

CHAPTER 5 FINDINGS AND ANALYSES
5.1 Gender and age
5.2 Choice of supermarkets
5.3 Shopping frequency
5.4 Supermarkets and product categories
5.5 Supermarkets and differentiation factors
5.6 Rated importance of differentiation categories

CHAPTER 6 CONCLUSION

REFERENCES

BIBILIOGRAPHY

APPENDICES A – Statement of Learning
B – Food retail formats
C – Supermarket sales
D - Questionnaire

Last page

Declarations

I declare the following:-

(1) that the material contained in this dissertation is the end result of my own work and that due acknowledgement has been given in the bibliography and references to ALL sources be they printed, electronic or personal.

(2) the Word Count of this Dissertation is 10.922

(3) that unless this dissertation has been confirmed as confidential, I agree to an entire electronic copy or sections of the dissertation to being placed on Blackboard, if deemed appropriate, to allow future students the opportunity to see examples of past dissertations. I understand that if displayed on Blackboard it would be made available for no longer than five years and that students would be able to print off copies or download. The authorship would remain anonymous.

(4) I agree to my dissertation being submitted to a plagiarism detection service, where it will be stored in a database and compared against work submitted from this or any other School or from other institutions using the service.

In the event of the service detecting a high degree of similarity between content within the service this will be reported back to my supervisor and second marker, who may decide to undertake further investigation which may ultimately lead to disciplinary actions, should instances of plagiarism be detected.

(5) I have read the University Policy Statement on Ethics in Research and Consultancy and the Policy for Informed Consent in Research and Consultancy and I declare that ethical issues have been considered and taken into account in this research.

SIGNED:

DATE:

STUDENT NAME Cornelia OBITZ

DEGREE BA (Hons) Business Studies

DISSERTATION SUPERVISOR Bill Houston

DISSERTATION TITLE An empirical investigation of

supermarket differentiation

DATE April 2008

KEYWORDS COMPETITIVE-ADVANTAGE

DIFFERENTIATION

CUSTOMER-PERCEPTION

SUPERMARKETS-UK

ABSTRACT

Supermarket chains are operating in a profitable market but they are confronted with the problem of high competition and compared to manufacturers they have only few possibilities to differentiate. This dissertation examines and explains this situation.

The importance of differentiation is questioned. It is examined whether differentiation is essential for gaining competitive advantage. Possibilities for differentiation are identified with theories of manufacturers and retailers. Aspects of customer perceptions are considered as important as differentiation and thus, included and linked to differentiation strategies.

The study ascertained best practice by surveying students to examine perceived differentiation factors. Upon critical success factors perceived added value is identified as a major issue of differentiation strategies.

The research led to the fact that differentiation is not conducted by all supermarkets and that undifferentiation can also be a profitable strategy. Hence, positioning strategies solely based on differentiation is seen as inadequate. For a successful applied competitor based strategy a combination of differentiation types, price and differentiation interdependencies, market segmentation and customers’ critical success factors is suggested.

The study also identifies that some competitors are applying strategies that can not sustain in long-term. Further considerations of the development of these supermarkets seem to be interesting.

ACKNOWLEDGEMENTS

Thanks are owed to my tutor Bill Houston, for his advice and guidance throughout this project.

Special thanks go to my parents who belief in me and support me unconditional wherever they can. I also want to thank my both sisters and my brother who cheered me up whenever it was necessary.

Thanks to Julia for encouraging me and sharing hundreds of hours with me in the living room.

Finally I want to thank all students and friends who participated in this study and supported me.

LIST OF FIGURES

5.1 First and second choice supermarkets

5.2 Shopping frequency

5.3 Product categories and deviations of first and second choice

5.4 Product categories and deviations of first and second choice

5.5 Product categories for each supermarket

5.6 Comparable product categories for each supermarket

5.7 Coding of the likert scale

5.8 Average scores of differentiation factors

5.9 Product

5.10 Price

5.11 Service/Personnel

5.12 Convenience

5.13 Differences between maxima and minima

5.14 Differentiation factors and supermarkets

5.15 Subgroup 1

5.16 Subgroup 2

5.17 Subgroup 3

5.18 Subgroup 1 – 3

5.19 Interdependency of price and differentiation

5.20 Ranking of product, price, service and convenience

CHAPTER 1 INTRODUCTION

This chapter explains the choice of the topic and introduces main objectives of the dissertation. Furthermore a short outline of each chapter gives an overview of the whole project.

1.1 Choice of the topic

Shopping at supermarkets plays an important role in our all lives. Food consumption increased immensely over the past decades and transferred food retailing into a potential and profitable market especially for big supermarket chains in the UK (Seth & Randall, 2001). However this has been realised not only by a few enterprises, thus food retailing became a challenging and demanding business in a high competitive environment (Harris & Ogbonna, 2001). In correlation with these facts the first question that comes in mind is ‘how can all these supermarkets compete successfully and defend their market position?’. It is generally agreed that competitive advantage is necessary for companies to be successful. Mintzberg (1998) explains that supermarkets have represented successful generic strategies in the past but they must go beyond this generic strategy and find a way of competing in this business. With this background differentiation turns out as a current problem in the field of food retailing (Seth & Randall, 2001). Above all, plenty of theories of competitive advantage for manufacturers exist but retailing is still a sparely investigated field (Morschett, Swoboda & Schramm-Klein, 2006).

Furthermore food retailers in the UK are operating in a high competitive industry more than every other European country and Cox & Brittain (2000) describe grocery retailing in the UK as an interesting field of competitive battles. Thus, theories are applied especially to supermarkets in the UK.

Hence, this study focuses on the largest supermarket chains in the UK and the role and importance of differentiation in the field of competitive advantage is investigated and questioned.

1.2. Academic objectives of the dissertation

The objective of this dissertation is to enrich the profound and wide field of competitive advantage with new findings. With the investigation of differentiation in food retailing a so far scarce analysed but complex topic is enlightened.

During the exploration of the literature it became apparent that differentiation strategies are only of value for companies when differences between companies or brands add value to customers. Hence, customer perception creates a further main part of the literature review and the research.

An empirical study with customers is conducted to highlight the customer perception of differentiation strategies in the UK food retail industry. The aim of the study is to reveal to what dimensions customer perception can influence differentiation strategies.

The end result of primary research will rectify whether theory and practice of competitive advantage match up. Finally advices for keeping or changing strategies are given and it is suggested how theories should be handled in further research.

1.3.Outline of chapters

Chapter 2 illuminates the main issues in the food retail industry and market.

In Chapter 3 the theory of the chosen topic is discussed. Competitive advantage, differentiation, positioning and customer approaches justify the chosen approach for the later research.

Chapter 4 narrows research questions, explain and legitimate the chosen research methods, describe limitations and bias of the survey and insures that ethical issues are no disregarded.

Chapter 5 illustrates the findings of the survey and questions them. Additional these are analysed and linked to theories of the literature review.

Chapter 6 highlights the main results of the research on the basis of the given research questions and suggests issues that should be considered in the future.

CHAPTER 2 SETTING THE SCENE

The last few decades has shown an immense progress in the retail grocery industry in the UK. In the 1970s groceries realised that size matters and enables economies of scale (Seth & Randall, 2001). Multiples, which are defined as an organisation with ten or more branches (Cox & Brittain, 2000), began to close smaller shops and opened superstores and hypermarkets (characteristics for store formats are given in Appendix A). Nowadays the increasing powerful supermarket chains like Tesco,

J Sainsbury, Asda and Morrisons displaced independents which own a market share of less than 15% (Seth & Randall, 2001). Furthermore they do not only cover the market with big superstores but also with convenience stores. Department stores such as Marks & Spencer (supermarket sales are presented in Appendix C) should not be underestimated but specialty stores and internet shops as direct competitors can be disregarded.

From 2002 to 2006 the UK food retail market has shown a compound annual growth rate of 3,1% and generated total revenues of $223,3 billions in 2006. Until 2011 a similar growth is forecasted. This implies a significant better performance than other European markets like in Germany or France. Remarkable is that UK supermarkets seem to be the lucky winners with generating 66,5% of total food retail revenues (Datamonitor, 2007).

Food retailing in the UK consists of a small number of competitors that share a very large percentage of sales within a market. Hence, they represent a high level of concentration (Varley & Rafiq, 2004). Different other current sources (Seth & Randall, 2001, Mintel, 2007a, Harris & Ogbonna, 2001, Datamonitor, 2007, Levy & Weitz, 1998) confirm that food retailers are acting in an increasing high competitive industry. In addition to high competition among successful national chains like Tesco, J Sainsbury, Morrisons and Somerfield other powerful international players and European discounters like Wal-Mart or Aldi and Lidl are trying to capture the market (Levy & Weitz, 1998, Seth & Randall, 2001).

A further aspect that supermarkets have to challenge is the changing consumer who is becoming more self-centred (Cox & Brittain, 2000). Seth and Randall (2001, p.311) describe the today’s “prosumer” as “more discriminating, more knowledgeable about the brands and offers available, more capable of rejecting apparent authority and more confident about making individual choices”. These arguments do all underpin that consumer loyalty is harder to maintain. Aaker (1991) arguments, that by the reduction of brand loyalty, the vulnerability of the customer base to competitive action is increased. This means on the one hand that it is harder to maintain committed buyers but on the other hand new customers can be attracted easier when stores make a true difference.

Comprising these facts it is obvious that supermarkets should exploit all possibilities of gaining competitive advantage but Seth & Randall (2001) figure out that one of the biggest challenges that supermarkets have to face is the necessity of differentiation. The authors criticise that most of the customers would not be able to identify a truly distinctive store personality. Conant, Smart & Solano-Mendez (1993, p.255) point out that the “development of competitive advantage in retailing today has become a complex and sometimes insurmountable challenge”. Already in the 1980s it became clear that competitive advantage plays an important role in grocery retailing strategies. The need for differentiation early appeared because of competitive pressure (Beaumont, J. A., 1987) but retail theories and investigations to solve this problem are still rare (Morschett, Swoboda & Schramm-Klein, 2006).

CHAPTER 3 LITERATURE REVIEW

This chapter explores essential theoretical background of the chosen topic. Competitive advantage, strategic positioning, customer perception and differentiation are discussed and form the basics for the research.

3.1 Competitive advantage

Ohmae (1982, p.36) emphasises that “business strategy is all about competitive advantage” which implies that competitive strategies are a broad and an almost unlimited field with plenty of theories, studies and definitions. Most definitions of competitive advantage explain the state of advantage and how it is gained.

Authors usually agree on the state of competitive advantage which means simply a superior performance of an enterprise relative to its competitors (Thompson, 2001, Johnson & Scholes, 2001, Ohmae, 1982, Porter, 1985).

Opinions of how competitive advantage is gained differ. Aaker (2001) lists different various focal points that should be included in theories of competitive advantage. According to him strategies of competitive advantage should be embedded in the marketplace (e.g. customer needs must be bearded in mind), should be underpinned by assets and competencies, additional should be substantial enough to make a difference, be sustainable, competitors should be considered and if possible leveraged into visible business attributes that will influence customers.

To clarify which theories and explanations for competitive advantage are suitable for this study a few strategies based on a categorisation by Ohmae (1982) are named. He demonstrates that any business strategy must take into account three main players which form the so called “strategic triangle”, consisting of customers, competitors and the corporation.

3.1.1 Resource-based approach

According to Ohmae (1982) corporate-based strategies are functional. Key functional areas or key factors for success can be found in resources of capital, people and time (Ohmae 1982). Another resource-based approach provides Prahalad & Hamel (1990) with their theory of core competences, adding value theories demonstrated by Kay (1993), or sources of differentiation based on a firm’s value chain shown by Porter (1985).

These theories give information about how competitive advantage can be constructed so that it is inimitable and established for the long-term but they do not emphasise differences between companies. Furthermore these theories often poorly describe that creating value to customers is important (Johnson, Scholes & Whittington, 2008).

3.1.2 Competitor-based approach

Porter’s positioning school and his competitive generic strategies are the most discussed theory in the field of competitive advantage.

Porter (1980) argues that in the long-term above-average performance is only possible with sustainable competitive advantage which can be achieved through two basic types: differentiation and cost-leadership. More updated sources like Thompson (2001) argument that strategic positioning and competitive advantage are not the same and that competitive advantage does not come from simply being different.

However competitive advantage is essential for enterprises and supermarkets to survive (Faulkner & Campbell, 2003, Varley & Rafiq, 2004) and differentiation seems to be undoubtedly an important part of it. This is shown by Aaker (2001) who describes differentiation and low-cost as two essential strategic thrusts. Porter’s competitive generic strategies are fundamental for competitive advantage as competitive advantage is dependent upon strategic positioning and is typically built around differentiation and cost management (Thompson, 2001, Pearce & Robinson, 2000). Other authors followed Porters ideas, criticised them and suggested distinctive theories which are explained in section 3.2.

3.1.3 Customer-based approach

According to Ohmae (1982) the resource-based and the competitor-based approach are connected to customers with adding value processes. The resource-based approach explains where and how value is created in a company (Porter, 1985) but this is less helpful for this study. More interesting might be a look on how added value through differentiation is perceived by customers which links customers with the competitor-based approach as shown by Rumelt (1998, p.59): “A firm’s positioning consists of the products or services it provides, the market segments it sells to, and the degree to which it is isolated from direct competition”. That superiority is not only achieved through a competitor-centred perspective but also through a customer-focused approach is also shown by various authors (Day & Wensley, 1988, Johnson & Scholes, 1997, Porter, 1985). Faulkner and Bowman (1995, p.7) point out that “competitive strategy is essentially about meeting the needs of customers more effectively than your competitors are able to meet them”. Thus, only if a difference is perceived by customers it can draw a distinction in turnover and an outstanding performance. Hence, in conjunction with a customer-based approach, segmentation (Kotler et al., 2002) and critical success factors (Johnson, Scholes & Whittington, 2008) are considered.

3.2 Strategic positioning, differentiation and customer perception

This section considers the two chosen approaches more in detail. In conjunction with the competitor-based approach strategic positioning and differentiation is considered in section 3.2.1 and 3.2.2. A customer-based approach is highlighted with customer perceived value theories and tried to link to differentiation in section 3.2.3.

3.2.1 Strategic positioning

Porter’s generic competitive strategies established the first steps of the positioning school at the beginning of the 1980s and made this the dominant school in the field of competitive strategies (Mintzberg, Lampel & Ahlstrand, 1998, Thompson, 2001). According to Porter (1985, p.11) “positioning determines whether a firm’s profitability is above or below the industry average”. He suggests two main strategies which should result in an above average performance: cost-leadership and differentiation. When a cost-leadership strategy is aimed the company must keep its overall costs lower than its competitors through a set of functional policies like efficient-scale facilities or R&D. So the company can either keep its prices low and gain a higher market-share or it can gain higher margins with comparable prices to its competitors. When a differentiation strategy is applied the uniqueness of the company is targeted through e.g. service or a better technique. Both strategies can be executed with a focus on a narrow strategic target like a particular buyer group or a specific geographic market to serve it more effectively or efficiently compared to competitors.

Porter (1980, p.17) warns that both basic strategies should not be applied together because of the “stucking in the middle” phenomenon. Porter wrote that “stuck in the middle is often a manifestation of a firm’s unwillingness to make choices” and “different types of competitive advantage usually requires inconsistent actions” (Porter, 1985, p.17). He (Porter, 1980, p.38) notes also that “in some businesses differentiation may not be incompatible with relatively low-costs and comparable prices to those of competitors”. Many authors might have misunderstood his advice and criticised his work based on the exclusiveness of both strategies (Mintzberg, 1991). Independent of this controversial discussion, definite is, that both strategies can work together and are even sometimes advisable. Johnson & Scholes (1997) call this a hybrid strategy.

3.2.2 Types of differentiation

It is often criticised (Faulkner & Johnson, 1992, Sanchez & Heene, 2004, Aaker, 2001) that Porter’s generic strategies are oversimplified. Mintzberg (1998) gives more detailed information and divides differentiation into six types: price, image, support, quality, design differentiation and undifferentiation. While Porter tries to explain the interdependencies between cost/price and differentiation, Mintzberg classifies price as a further type of differentiation. This strategy gives more detailed information about differentiation but lacks relationships between differentiation types. According to Strebel (1991, p.82) “successful strategies vary from one industry to another”. That the retail industry might deserve an extra treatment shows Porter (1980) who explains that not every strategy can be applied to every industry. For example companies in an industry with a high competitive environment might not be able to use only a cost-leadership strategy and a differentiation strategy becomes necessary to achieve an above-average return. Thus differentiation types by Mintzberg are deepened and linked to retailing in section 3.3.

3.2.3 Strategic positioning and customer perceived value

With a customer-focused approach the full range of competitive choices in the light of customer needs and perceptions of superiority can be examined (Day & Wensley, 1988).

Faulkner & Bowman (1995) developed a competitive strategy model called the “customer matrix” or “strategy clock” that combines differentiation and customer value. It can be compared with Porter’s generic competitive strategies because of the following reason. Even though differentiation is not the same as perceived customer value it is in the most cases a prerequisite for providing higher value. Thus, differentiation can result in a higher perceived customer value and cost-leadership can be implemented with low-prices. Faulkner & Bowman (1995) explain more detailed the interdependency between the degrees of perceived value from low to high price.

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