STRATEGIC PLAN FOR PENNY MARKET IN VIETNAM

International University - Strategic Management STRATEGIC PLAN FOR PENNY MARKET IN VIETNAMHow to Compete With Other Retailers

Pham Nguyen Thanh Thao MBA0705411/17/2014

Contents1.Introductory Statement32.Background Information53.Management Board and Staff (as information updated in 2013)74.Organizational Tenets84. 1 Organizational Mission84.2 Pennys vision84.3 Ethical84.4 CulturalValues95.ANALYSIS OF RESOURCES, COMPETENCE AND CULTURE95.1 INDUSTRY ANALYSIS: PESTEL FRAMEWORK95.1.1 Political Factors95.1.2 Economical Factors105.1.3 Social/Cultural Factors115.1.4 Technological Factors125.1.5 Environmental Factors125.1.6 Legislative Factors135.2. INDUSTRY ANALYSIS: PORTERS FIVE FORCES145.2.1 Threat of New Entrants145.2.2 Bargaining Power of Suppliers145.2.3 Bargaining Power of Customers155.2.4 Threat of Substitutes155.2.5 Bargaining Power of Competitors155.3 SWOT Analysis165.3.1 Core Competence Strengths165.3.2 Weaknesses175.3.3 Opportunities185.3.4 Threats195.4 Core competency framework206.0 CRITICAL SUCCESS FACTORS226.1 Branding and Reputation226.2 IT Integration236.3 Supplier Management237.0 PENNYS STRATEGIC OPTIONS: GENERIC STRATEGIES248.0 MARKET OBJECTIVES AND STRATEGIES IMPLEMENTATION259.0 CONCLUSION28REFERENCES30

1. 2. Introductory StatementVietnam is a growing market with more and more opportunities for opportunities for foreign retailer to expand in the market. From traditional markets with traditional shopping habits, now many Vietnamese, especially those who live in big cities, are familiar with supermarkets. The biggest retail chain in Vietnam is Coopmart, which was established in . Beside Coopmart, there are other retailers, and together they showed amazing growth in both size and revenue. The table below for gives some information about 10 biggest local retailers in Vietnam interms of the number of branches in 2014No.Brand NameOrganizationYear of EstablishmentType of storeBranches in 2014

1CoopmartSaigon Coop1996Supermarket70

2Coop storeSaigon Coop1989Discount Store68

3CitimartDong Hung Ltd. Co.1994Supermarket26

4MaximartAn Phong Joint Stock1992Supermarket3

5Ocean MartOcean Group Co.2007Supermarket9

6Satra MartSATRA1995Supermarket3

7Satra FoodSATRA1995Convenient Store45

8Lan Chi MartLan Chi Ltd. Co.1995Supermarket11

9FoodcomartFood company of Ho Chi Minh City Ltd2009Convenient Store60

10Shop and GoShop & Go Joint Stock Co2005Convenient Store100

Today, the opportunities are no longer limit for local retailers but also open for foreign companies. After Vietnam joined WTO in 2007, the trend of foreign distributors entering the marking is growing more. Those distributors come from many countries, which give more diverse to the market itself. There are a numbers of popular retailers, who make the market more competitive and challengingNo.Retailer NameOriginalYear of Entering VietnamType of storeBranches in 2014

1Big CFrance1998Supermarket26

2MetroGermany2002Supermarket19

3LotteKoreaSupermarket7

4Circle KAmerica2008Convenient Store70

5Aeon MallJapanShopping Mall

6Famiy MartJapan2013Convenient Store56

7Giant StoreHong Kong2011Supermarket1

8Central Department StoreThailand2014Department Store1

9DaisoJapan2008Price-Point retailer3

10Haichi HaichiJapan2007Convenient Store4

However, Vietnamese consumer behavior has changed rapidly in accordance with the change in technology and the information shared world-wide. Their requirements for the product they are going to buy are more and more complicated. Not only do the products have to be in good quality with reasonable price, they also have to come from a trustworthy producer. And most recently, consumers require healthy products: from food, plastic, clothes to furniture. They are switching from choosing the cheapest product in the supermarket to choosing the most reasonable price with satisfied requirements. And their criteria lists are still growing.Some believes that entering Vietnamese market now is more difficult because the market is almost saturated. However, the market still has huge potential to grow. Although price is the essential requirement, Vietnamese consumers tend to prefer exported products than local products. And with the increasing number of foreign visitors, and employees in Vietnam, a foreign retailer who could satisfy all these need can win the market and make huge profit.According to Philippe Bacac, CEO of Metro Carry Vietnam, Vietnam's population will increase by about 16 million people from 2000 to 2020. In the retail sector, the share of modern trade channel is only about 30% of while this figure is over 70% in some European countries such as France and Germany.According to development planning network of supermarkets, commercial centers by 2020, Vietnam will have 1200-1300 supermarkets, 180 trade centers with the proportion of retail channel accounted for 45% of total retail sales the country.That creates more opportunities for the development of modern trade in Vietnam. Moreover, the study shows that Vietnam has very fast growth rate and although not in the Top 30 list of the most attractive markets in the world (according to the AT Kearney), but this is still a market potential.Besides, the increasing demand for high quality products and safe, as well as higher incomes and the development of the field of food, restaurants, hotels and service ... will continues with the economy more than 90 million people. All these factors show that the prospect for the retail sector in Vietnam is still growing interestingly.That is why Penny Market wants to penetrate in the market.3. Background InformationPenny Market (or Penny, in German - Pennymarkt) is adiscountsupermarketchain founded in 1973. The company offers grocery products, fresh vegetables and fruits, baked food items, meat and related food products. It provides baby products, cosmetics, toiletries, pet food, wine and spirits, and dairy products. Pennys services include home delivery and gift coupons on bulk purchases. The company operates as a subsidiary of German based REWE group. Penny is headquartered in Koln, Nordrhein-Westfalen Germany. The company retails its merchandise through its retail stores and website. It operates in Germany, Austria, the Czech Republic, Hungary and Romania. Today it and operates in more than 2,200 stores in Germany and more 3,000 stores in Europe Table 1. Number of Penny store in EuropeCountryStores

Austria80

Bulgaria48

Czech Republic341

Germany2,401

Hungary192

Italy299

Romania150

Since the end of 2011, they have gradually modernized their stores all around Europe with an intention to become a global brand market. The new logo with red background and white font with the word "market" disappeared emphasize the companys will to become stronger, brighter and more attractive to the consumersPenny discount grocery chainspecializes in providinga quick and efficient shopping experience, while providing all the quality goodsEuropean shoppers have come to expect. With some 2,000 locations in Germany, and another 900 in Austria, the Czech Republic, Hungary, and Romania, Penny offers a full line of grocery products at discount prices (please see the table below)

Table 2 Penny's product CategoryProducts

Fruits and Vegetables

Bread

Bakes Goods

Meat (chicken, pork, beef)

Dairy Products (Milk, yogurt, cheese)

Cosmetics

Baby Products

Wine and Spirits

Fast Food (under brand name Penny-to-go

Services

Home Delivery

Gift Coupons

With the revenue of 9billions Euros in 2013, the growing company is looking to expand into new markets, including Italy. And now they are looking for some new emerging markets to expand their brand name world-wide. 4. Management Board and Staff (as information updated in 2013)January Kunath: Managing Director, Chairman, Executive BoardJochen Baab: Managing Director, Senior ManagementJan-peer Brenneke: Managing Director, Senior ManagementAndreas Conrad: Managing Director, Senior ManagementStefan Magel: Managing Director, Senior ManagementIn 2010, there are 43,773 employees working at all Penny subsidiaries in Europe.5. Organizational Tenets4. 1 Organizational MissionMission is the prime goal of an organisation to achieve the end results. Through minute observation it can be said that Pennys mission is to improve more opportunities for the customers offering them loyalty cards and convince them to buy the double even in the economic downturn. Penny takes pride in vast productivity and continuous improvement of the products.A research by Sufi and Lyons (2003) from the literature shows that most of the writers are agreed upon defining mission statement as: concern for the customers purpose, identity/ image, differentiation factors, corporate values, products, markets and concern for the survival, growth, profitability, company philosophy and employees and social concern.Penny is now a brand name meeting the demands of the customers for reasonable price products with good quality and durable in time. It is looking for a worldwide strategy to bring Penny brand name with many supermarket operating throughout the world.4.2 Pennys visionVision can be defined as the desired or intended future state of an organization or enterprise in terms of its fundamental objective and/or strategic direction. Vision is a long term view, sometimes describing how the organization would like the world in which it operates to be. Pennys vision reflects in their slogan Every Little Helps a lot. As a fast growing company it has gone from simply selling groceries to providing anything from loans to mobile phones. By setting out in all these new directions Penny endeavors to be close to the customers, meets their most basic needs4.3 EthicalPenny has successfully been maintaining its commitment for being a good neighbour through stores. Penny created over 14,000 new jobs in 2008 (REWEs websites). Since 2000 the company is regenerating German communities venturing partnership with local communities. The other contributions that Penny is making include supporting local economics, promoting active lifestyles, supplier relations, German code practice, monitoring animal welfare. When operating in Italy, Penny also helped young people there with training, workshops beside providing them jobs to do.4.4 CulturalValuesOur Vision guides the direction and the decisions we take as an organisation. Penny is a company built around customers and colleagues, high-quality assets around the world and multiple opportunities for growth and these characteristics are central to our Vision for the business.6. ANALYSIS OF RESOURCES, COMPETENCE AND CULTURE5.1 INDUSTRY ANALYSIS: PESTEL FRAMEWORKBonn (2001, pp.63-70) states that when review the organisations environment, it requires an understanding of how different problems and issues are connected with each other and what affect one solution in a particular area would have on the areas.Strategic planning effects the organisation in various ways. Since as a supermarket Penny emerged reforming strategic changes from time to time to have a strong voice in the competitive market. There are different strategies that the company shuffled and reshuffled over the years which can be analysed both externally and internally. To analyse external factors in the context of modern business world PESTAL ANALYSIS has been handy to illustrate Pennys external environment. PESTAL ANALYSIS includes the aspects such as political, economical, socio cultural, technological analysis. In the following chart they are illustrated:5.1.1 Political FactorsPenny is operating in the GERMANY as well as throughout Europe with around 4000 stores. Because of Pennys massive performance and noticeable presence in the market, the company is highly influenced by the political and legislative conditions of these countries.Operating in a globalized environment with stores around the globe (Penny now operates in six countries in Europe in addition to Germany, Pennys performance is highly influenced by the political and legislative conditions of these countries, including the European Union (EU).For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994). Also to meet the demand from population categories such as students, working parents and senior citizens. Penny understands that retailing has a great impact on jobs and people factors (new store developments are often seen as destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete), being an inherently local and labour-intensive sector. Penny employs large numbers of; student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable employees.For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994). Also to meet the demand from population categories such as students, working parents and senior citizens government imposes new regulations which may create mounting pressure on grocery stores like Penny and it competitors. Penny understands that retailing has a great impact on jobs and people factors as traditional stores go out of business or are forced to cut costs to compete. Being an inherently local and labour-intensive sector, Penny employs large numbers of student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable employees.5.1.2 Economical FactorsEconomic factors are of concern to Penny, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods.These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing (Appendix A), and is expected to contribute greater amounts to Pennys profits over the next few years, the company is still highly dependent on the GERMANY market. Hence, Penny would be badly affected by any slowdown in the GERMANY food market and are exposed to market concentration risks.Present economic factors are vastly influencing demand, costs, prices and profits. In the ebb and tide of economic downturn, Penny has reduced price and added value to draw more consumers even when the unemployment rate is high and demand for many goods is decreasing.These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing and is expected to contribute greater amounts to Pennys profits over the next few years, the company is still highly dependent on the German market. Hence, Penny would be badly affected by any slowdown in the German food market and are exposed to market concentration risks.5.1.3 Social/Cultural FactorsCurrent trends indicate that Vietnamese customers have moved towards one-stop and bulk shopping, which is due to a variety of social changes. Penny should, therefore, increased the amount of non-food items available for sale.Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that German retailers are also focusing on added-value products and services. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Clarke, Bennison and Guy,1994; Datamonitor Report, 2003).The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and their attitudes towards food are constantly changing. One example of Penny adapting its product mix is to accommodate an increased demand for organic products. The company should also allow customers to pay in cheques and cash at the checkout.Demographic The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier .5.1.4 Technological FactorsTechnology is a major macro-environmental variable which has influenced the development of many of the Penny products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient. The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food supply chains (Datamonitor Report, 2003). Penny stores utilise the following technologies: Wireless devices Intelligent scale Electronic shelf labelling Self check-out machine Radio Frequency Identification (RFID).The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Finch, 2004).Technology is a major macro-environmental variable which has influenced the development of many of the Penny products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient. Penny can be applauded for online shopping as its slogan says YOU SHOP, WE DROP at the doors.5.1.5 Environmental FactorsIn 2003, there has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003). The major societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence, by recognizing this trend within the broad ethical stance, Pennys corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. (Johnson and Scholes, 2003) Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for sustainable consumption and production to cut waste, reduce consumption of resources and minimise environmental damage. The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called fat tax directly affected the Penny product ranges that have subsequently been adapted, affecting relationships with both suppliers and customersThere has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003). Hence, by recognizing this trend within the broad ethical stance, Pennys corporate social responsibility keeps on working on these vital social issues.Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for sustainable consumption and production to cut waste as well as reduce consumption of resources and minimize environmental damage. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Clarke, Bennison and Guy,1994).Nowadays consumers are becoming more and more aware of health issues, and their attitudes towards food are constantly changing. In this regard, what Penny adapts is to accommodate an increased demand for organic products.5.1.6 Legislative FactorsVarious government legislations and policies have a direct impact on the performance of Penny. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004). The presence of powerful competitors with established brands creates a threat of intense price wars and strong requirements for product differentiation. The governments policies for monopoly controls and reduction of buyers power can limit entry to this sector with such controls as license requirements and limits on access to raw materials (Mintel Report, 2004; Myers, 2004). In order to implement politically correct pricing policies, Penny offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate.Various government legislations and policies have a direct impact on the performance of Penny. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004)5.2. INDUSTRY ANALYSIS: PORTERS FIVE FORCES5.2.1 Threat of New EntrantsThe German grocery market is primary dominated by few competitors, including four major brands of Penny, Aldi, Lild and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Budgens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure. This powerful force had a great impact on the small traditional shops, such as butchers, bakers and etc. Hence, nowadays it possesses a strong barrier for new companies who desire to enter the grocery market. For instance, it becomes rather difficult for new entrants to raise sufficient capital because of large fixed costs and highly developed supply chains. This is also evident in huge investments done by large chains, such as Penny, in advanced technology for checkouts and stock control systems that impact new entrants and the existing ones. Other barriers include economies of scale and differentiation (in the provision of products or services with a higher perceived value than the competition) achieved by Penny and Aldi seen in their aggressive operational tactics in product development, promotional activity and better distribution.5.2.2 Bargaining Power of SuppliersThis force represents the power of suppliers that can be influenced by major grocery chains and that fear of losing their business to the large supermarkets. Therefore, this consolidates further leading positions of stores like Penny and Aldi in negotiating better promotional prices from suppliers that small individual chains are unable to match Ritz (2005). In return, GERMANY based suppliers are also threatened by the growing ability of large retailers to source their products from abroad at cheaper deals. The relationship with sellers can have similar effects in constraining the strategic freedom of the company and in influencing its margins. The forces of competitive rivalry have reduced the profit margins for supermarket chains and suppliers.5.2.3 Bargaining Power of CustomersPorter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers Porter M. (1980). Pennys famous loyalty card Clubcard remains the most successful customer retention strategy that significantly increases the profitability of Pennys business. In meeting customer needs, customizing service, ensure low prices, better choices, constant flow of in-store promotions enables brands like Penny to control and retain their customer base. In recent years a crucial change in food retailing has occurred due to a large demand of consumers doing the majority of their shopping in supermarkets that shows a greater need for supermarkets to sell non-food items. It has also provided supermarkets with a new strategic expansion into new markets of banking, pharmacies, etc. Consumers also have become more aware of the issues surrounding fairer trade and the influence of western consumers on the expectations and aspirations of Third World producers. Ecologically benign and ethically sound production of consumer produce such as tea, coffee and cocoa is viable, and such products are now widely available at the majority of large chains.5.2.4 Threat of SubstitutesGeneral substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are emerging in the industry. In this case Penny, Aldi and Sainsburys are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centres Ritz (2005).5.2.5 Bargaining Power of CompetitorsThe grocery environment has seen a very significant growth in the size and market dominance of the larger players, with greater store size, increased retailer concentration, and the utilisation of a range of formats, which are now prominent characteristics of the sector. As it was mentioned above, the purchasing power of the food-retailing industry is concentrated in the hands of a relatively small number of retail buyers. Operating in a mature, flat market where growth is difficult (a driver of the diversification into non-food areas), and consumers are increasingly demanding and sophisticated, large chains as Penny are accruing large amounts of consumer information that can be used to communicate with the consumer Ritz (2005). This highly competitive market has fostered an accelerated level of development, resulting in a situation in which German grocery retailers have had to be innovative to maintain and build market share. Such innovation can be seen in the development of a range of trading formats, in response to changes in consumer behaviour. The dominant market leaders have responded by refocusing on price and value, whilst reinforcing the added value elements of their service.5.3 SWOT AnalysisPenny is the top grocer and leading retailer in its home market of the Germany. Pitched at the broad middle mass-market, it has maintained its position through a clear focus, well targeted product offer and excellent record both in product and format innovation. Penny also leads the world in online grocery retailing. In the Germany the company concentrates on running grocery superstores, c-stores and an online service. Elsewhere the focus is usually on hypermarkets. In 2003, the groups trading record around Europe and Germany has been outstanding.5.3.1 Core Competence StrengthsIncreasing market share:Penny holds a 13% share of the GERMANY retail market. Its multi-format capability means that it will continue to grow share in food, while increasing space contribution from hypermarkets will allow it to drive a higher share in non-food.Pennys general growth and ROI show no sign of abating:In the GERMANY, Pennys late 2002 investment into West-midlands based convenience store group T&S was billed as the most aggressive move into the neighborhood market by a big-name retailer so far. The deal has turned Penny into the countrys second biggest convenience store chain after the Co-operative Group, and the company also plans to open up 59 new stores in the GERMANY this year. Penny has grown its non-food division to the extent that its revenues now total 23% of total group earnings. Pennys international business segment is growing steadily, and is predicted to contribute nearly a quarter of group profits over the next five years. If geographical spread continues to grow, this will ensure Pennys continued regional strength.Insurance:In fiscal 2003 Penny Personal Finance reached the milestone of one million motor insurance policies, making it the fastest growing motor insurance provider ever. Thegroups instant travel insurance allows Clubcard holders to buy their holiday insurance conveniently at the checkout. Pet insurance now has over 330,000 cats and dogs covered, while the life insurance policy followed on from the success of last year, when it was voted The Most Competitive Life Insurance Provider in the MoneyFacts Awards 2003.Penny online:Penny.com is the worlds biggest online supermarket and this year the group had sales of over 577 million, an increase of 29% on last year. Penny online now operates in over 270 stores around the country, covering 96% of the GERMANY. With over a million households nationwide having used the companys online services, the company has a strong platform to further develop this revenue stream.Brand value:Profits for Pennys operations in Europe, Asia and Ireland increased by 78% during the last fiscal year. The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value. Pennys innovative ways of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on this.Germanmarket leadership reinforced:Since acquiring number one ranking in 1996, Penny has developed a successful multiformat strategy that has accelerated its advantage. Its German sales are now 71% larger than Sainsburys. Also the Competition Commissions report makes it very difficult for a competitor to challenge its scale and has effectively scuppered Wal-Marts chances of stealing German leadership. Therefore, Penny is in an enormously strong position in its domestic market.Pennys strengths are hidden in its massive productivity and supply chain. Every door to store concept is the force that has enabled Penny to reach beyond customers expectation. While the sluggish economy is badly affecting the business, small or large, Penny maintains steady growth and supply even better than before. Loyalty cards have also been strengths of Penny to encourage the customers into multiple buying. Good reduced price with a bulk of choices has branded.5.3.2 WeaknessesReliance upon the German market:Although international business is still growing, and is expected to contribute greater amounts to Pennys profits over the next few years, the company is still highly dependent on the GERMANY market (73.8% of 2003 revenues). While this isnt a major weakness in the short term, any changes in the GERMANY supermarket industry over the next year for example, like the Morrisons group successfully purchasing the Safeway chain could alter the balance of German supermarket power, and affect share.Debt reduction:Penny is not expected to reduce its debt until at least 2016. Penny has a large capital expenditure program mainly due to its huge investment in space for new stores.Since its expansion is so aggressive, Penny has little free cash for any other operations.Signs point to serial acquisitions:With an enterprise value of 23 billion, Penny clearly has enormous firepower. Also, its product range is vast and almost any acquisition can be justified, particularly in Germany. While fill the gap strategy would be useful to the company, as has been the case with Germany convenience market, there is the danger of Penny becoming a serial acquirer, as this tends to reduce earnings visibility and quality.Being a large supermarket, to satisfy customers of all rank, Penny sometimes sells goods at lowest price that result in huge loss. Pennys bulk amount of loans is also great concern for the company. Sometimes to lower down the price Penny involves in bad bargain with the suppliers which causes non conformance to the customers demand and satisfaction and in many cases products become out of stock for time being.5.3.3 OpportunitiesNon-food retail:The growth in Pennys hypermarket format in Germany means that there are expectations of seeing its 13% share of retail sales climb sharply over the next few years. It can use its footfall and low cost structure together with improved merchandising skills to add another leg to growth. Equally, its growth overseas will further increase earnings and scale, taking Penny onto the virtuous circle of growth. It is estimated that Pennys non-food sales will double over the next four years.Its aim to be as strong in non-food as we are in food, no longer sounds like the consultancy-speak that it once did, and they are getting there using the basic tenets of value, choice and convenience that have been so successful in food. Around half of new space opened in Germany last year was for non-food and the result has been to increase its market share from 5% to 6% and its overall share of German retail sales has increased by 100 basis points to 12.8%.The companys telecoms venture is the latest stage in its strategy to develop popular retail services. It has repeated its approach in banking, by capitalizing on its brand.Health and beauty:Pennys German health and beauty ranges continue to grow, and it is currently the fastest growing skincare retailer in the market. The company has a volume market-leading position in both toiletries and healthcare and is number one retailer in the baby goods markets. Across all health and beauty ranges Penny continues to invest in price to deliver the value customers have come to expect and this year invested 27 million on health and beauty pricing alone. The company now has 19 stores with opticians and nearly 200 stores with pharmacies.Some of Pennys main opportunities are on the internet. No other grocery shops in the GERMANY offer immense opportunity that Penny can provide. Pennys online shopping exceeds the remaining competitors in terms of speed, facilities and availability. Thus Penny opportunity to flourish its wings in the market has been great threat for Sainsbury, Aldi and so on. Even the local small businesses are about to be abolished from the scene.Non-food retail: The growth in Pennys hypermarket format in the GERMANY means that there are expectations of seeing its 13% share of retail sales climb sharply over the next few years.Health and beauty: Pennys GERMANY health and beauty ranges continue to grow, and it is currently the fastest growing skincare retailer in the market.5.3.4 ThreatsGermanstructural change could spark a price war:The price followers in the GERMANY market are about to become aggressive investors in price, Safeway because of new ownership and Sainsbury because of new management. Morrison is reducing Safeways prices by up to 6% and Sainsbury is bound to see lower prices as one of the basic changes necessary to drive its recovery. With both Aldi and Penny committed to price leadership, this could result in a step down in industry profitability.Wal-Mart/Aldi challenge:Since the US shopping giant Wal-mart purchased Aldi, Pennys rank as the top German supermarket has been threatened. Aldi can now compete extremely well on price and range of goods. For the moment, Aldi is the third largest supermarket in Germany, just behind Sainsburys and then Penny. However, Aldi closed the gap on Sainsburys in 2003, leaving the company to directly challenge Pennys dominance.Penny is well aware of this, and has so far been quick to keep up with price cuts or special offers at Aldi. Wal-mart may also decide to wield its buying power more heavily in Germany, and this could spell the end of Pennys brand dominance in the future.International expansion:International growth is expensive. Entering new markets with a new brand requires heavy investment and marketing, as well as land prices (which are currently low) and extra distribution and operation expense. Pennys debt may increase before it begins to decline.Penny has changed its threats into opportunities by making sound strategy of cutting down prices on foods. The present recession has widened Pennys scope to hold the majority of German grocery market share. But Penny feels strong rivalry from Sainsbury and Aldi as they have come forward with good low price sometimes offer even better quality.5.4 Core competency frameworkSuperior performance, according to Johnson and Scholes (2003), has to be determined by the way in which companys resources are deployed to create competence in the organisational activities. Core competencies are activities or processes that critically underpin the companys competitive advantage. The primary target for the company is to recognize that competition between businesses is as much a race for competence as it is for market position and market power. Therefore, the goal for Penny management is to focus the attention on competencies that really affect competitive advantage.The competence leads to levels of performance from an activity or process that is significantly better than competitors. Benchmarking may help in understanding performance standards and what constitutes good or bad performance. However, it will be crucial for Penny to look at the generic level. Core competences may be embedded deep in Penny at an operational level in the work routines. The framework developed by Prahalad and Hamel in the 1990s suggests that over time companies may develop key areas of expertise which are distinctive to that company and critical to the companys long term growth (Drejer, 2000; De Toni, and Tonchia, 2003). In the case of Penny the areas of expertise are most likely to develop in the critical, central areas of the organisation where the most value is added to its service and its delivery. For example, trust in the Penny brand lies at the heart of these services and in 2003 the number of retail service accounts rose by 36%. Some 50,000 new service accounts per week are being opened and Penny sees these areas as long term businesses with the potential to build real scale. Financial services have also been launched internationally in for example Hungary and Korea (Datamonitor Report, 2003; MarketWatch, 2004).Through a long period of operations, core competencies of Penny have to be rather fixed. Prahalds and Hamels approach states that core competencies should change in response to changes in the companys environment and be flexible and evolve over time. Therefore, Penny needs to adapt to new rapidly changing circumstances and opportunities, so its core competencies will have to adapt and change. The example of this was when the company has launched its loyalty card and went into banking.Core competences framework suggests three factors, which can help to identify core competences:Provide potential access to a wide variety of markets: enables the creation of new products and services. For instance, Penny has established a strong leadership in food retailing industry. The core competence that enabled Penny to enter retailing of food and non-food products was a clear distinctive brand proposition that had a focus on a properly define market segment. Penny is recognized as the company, providing the most customized and efficient service, based on a good customer relationship management.Makes a significant contribution to the perceived customer benefits of the outcome: delivers a fundamental customer benefit. In order to identify core competences in a particular market, the question of why is the customer willing to pay more or less for one product or service than another- needs to be addressed. For example, Penny have been very successful in capturing the leadership of the retailing market. This shows that Penny designs and implements effective supply systems and deliver an efficient customer interface. Penny was the first German grocer to launch a loyalty card and has been the most effective. Palmer (2004) claims that until recently, it was the only grocer to use the information to mail customers every month.Difficult for competitors to imitate:highlights the need for a core competence to be competitively unique. This indicated the importance of product differentiation. For example, for many years up to 2003 (In 2003 Penny has been recognised a leading GERMANY food retailer) Penny had a very strong position within the retailing industry. It had a different approach to the service concept, providing good corporate reputation and introducing new premium quality products (MarketWatch, 2004).Applying this framework to Penny shows that the company in order to be successful has to base its business strategy on these capabilities. Capabilities result from Pennys ability to combine and exploit these resources in uniquely different ways. In the external environment, the intensity of competition is not completely under the retailers control, however, to compete effectively Penny have to identify its core competences and use them for companys advantage.6.0 CRITICAL SUCCESS FACTORSAfter a close evaluation of the external analysis of the grocery industry and SWOT analysis, it is crucial to consider internal operational effectiveness of Penny in the form of identifying critical success factors of the company within the food retailing sector.6.1 Branding and ReputationThere are companies that have always understood that they were selling brands before the products. Penny is a brand and also serves as the core strategic advantage. The company was spreading like wildfire transforming the generic into the brand-specific, largely through carefully branded packaging and the promotion of an every penny counts environment. The company has a strong brand image, and is associated with good quality, trustworthy goods that represent excellent value.The product and service development processes of the company have been substantially re-engineered, to facilitate better management of product lifecycles and more efficient delivery of wide ranges of products to customers. Product activity has focused on enhancing core ranges and introducing quality products. Pennys innovative ways of improving the customer shopping experience, as well as its efforts to branch out into finance and insurance have also capitalized on strong brand reputation.The company is also very successful in terms of customer loyalty due to its loyalty cards system and its general approach to customizing services to the needs of every customer. This is truly evident in terms of tremendous growth of on-line sales where the company has a strong platform to further develop this revenue stream. After considering the fact the nowadays majority of people have less time for shopping, Penny employed this on-line systems and now became the biggest online supermarket.6.2 IT IntegrationToday companies act in an increasingly dynamic and complex environment, giving more difficulties making forecasts and adapting themselves to the continuous changes. In order to be able to compete in this kind of world, it is necessary to innovate at an extraordinary speed, continuously improving the products, services and processes. For Penny operations have become necessities rather than luxuries. Systems that control stock, keep all the stock and deliveries records and analyse business transactions are the lifelines of the company. It can also be said that IT has risen beyond its traditional support role and taken up a central role in business strategy formulation.Extranet system employed by the company, enables Penny to use the Internet to create proprietary and customised information flows between the company and its business partners. The system connects business partners online behind virtual firewalls, bringing more flexibility, scalability, extensibility and integration across the distribution channels. Extranet also helps to extend the key information on business partners throughout the supply chain and facilitate collaborative relationships with partners. Market exchanges hold the promise of extending Pennys reach, delivering buyers to their virtual doorstep from around the world. Other examples of the most efficient technological advances that support daily business operations of Penny are wireless devices, intelligent scale, electronic shelf labelling, self check-out machine and radio frequency identification (RFID) systems. This technology is an effort to maintain Pennys ability to handle an increase in product/service volume while controlling costs; it also enables to be innovative and market oriented.6.3 Supplier ManagementPenny, like many other grocery chains companies, sources its goods from overseas manufacturers who are more competitive on price and volumes. For many years Penny has been supporting British jobs and expertise by encouraging large branded suppliers to develop exclusive production facilities. But in recent years the company has realised the need to look abroad for products no longer available in Germany, bud tried to do it through long-established German partners. The foods continued to be heavily German-based due to the very successful range of prepared foods.As a major retailer selling diverse product range, they work with many different suppliers around the world, with employees from many different cultures and ethnic groups. Therefore, it is the company policy and companys main approach to have unique relationships with suppliers. Applying advanced technology in its communications and cooperation with the suppliers, the company aims to control the work of its suppliers and heavily relies on their efficiency. The direct suppliers use a number of sub-contracted suppliers, selected to be best in class in their country. Penny has established close relationships with the contractors believing that regular and long term orders promote the investment necessary to improve conditions in the supply chain.Being an international company, Penny develops various supplier management programmes to survey key suppliers and franchisee satisfaction. The company also takes part in the Ethnical Trading Initiative.7.0 PENNYS STRATEGIC OPTIONS: GENERIC STRATEGIESStrategic planning is a step by step process with definite objectives and end products that can be implemented and evaluated. Very simply, it is a process by which we look into the future, paint a picture of that future based on current trends, and influence the forces that will affect us.Strategic planning looks three to five years ahead. It charts a definite course based on strong indicators of what the business environment will be like in those years.Indicators include census demographic statistics, economic indicators, government policies, and technological advances. They reveal strong trends regarding changes in lifestyles and the economic and political climates, which are important factors influencing the facilities planning and management industry. Some of these trends are potential opportunities, some potential threats, and some are both. Examining the possibilities and formulating strategies to meet the challenges can help the organization take full advantage of opportunities and minimize threats. In short, we can take control of the future. We can use our energies and resources more effectively and conduct our business more successfully, despite changes in the environment.Generic Strategies are characterised by an individual retailers response to the industry structure. For a giant retailer, such as Penny, to obtain a sustainable competitive advantage they should follow either one of three generic strategies, developed by Porter.The first strategy of cost leadership is one in which Penny can strive to have the lowest costs in the industry and offer its products and services to a broad market at the lowest prices. This strategy will be based on the Pennys ability to control their operating costs so well that they are able to price their products competitively and be able to generate high profit margins, thus having a significant competitive advantage. If Penny uses another strategy of differentiation, than it has to try to offer services and products with unique features that customers value. Penny will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings, technology, special features, or customer service are popular approaches to differentiation.The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused market. In pursuing a cost leadership strategy Penny focuses on the creation of internal efficiencies that will help them withstand external pressures. Therefore, it appears reasonable to think that Penny will have frequent interactions with the governmental/regulatory and supplier sectors of the environment. In accordance to this framework, while both overall cost leadership and differentiation strategies are aimed at the broad market, Penny may also choose to confine their product to specific market areas or may choose to offer a smaller line of products to the broad market, thus pursuing a strategy of focus or niche (Porter, 1980). In other words, Penny pursues a strategy of cost leadership or differentiation either in a specific market or with specific products.The danger some organisation face is that they try to do all three and become what is known as stuck in the middle. In case of Penny it is not appropriate, as they do have a clear business strategy with a clearly defined market segment.8.0 MARKET OBJECTIVES AND STRATEGIES IMPLEMENTATIONStrategy frameworks and structuring tools are key to assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective planning need to be developed by Penny as the strategic alternative.From the generic strategies discussed above, Penny is likely to employ two strategic options that are also likely to be primary market objectives of focus on market development though partnerships and diversification through new product development.Market Development Strategy: Joint Developments and Strategic AlliancesBy entering new markets like China and Japan it can serve as a key growth driver of the companys revenues and expansion strategy. Pennys interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets.In the case of Penny, one of the suggested strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence. By entering into joint ventures or partnerships, in order to gain a larger economy of scale and larger market presence, Penny will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Penny may feel that being the first mover is not necessarily an advantage. The success of the partnership will be related to three main success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating. It is about the rationale of this expansion-market development strategy. The acceptability relates to the expected return from the strategy, the level of risk and the likely reaction of stakeholders. Feasibility will be regarded to whether Penny has the resources and competence to deliver the strategy.By entering new markets like China and Japan it can serve as a key growth driver of the companys revenues and expansion strategy. Pennys interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets.In the case of Penny, one of the suggested strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence. By entering into joint ventures or partnerships, in order to gain a larger economy of scale and larger market presence, Penny will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Penny may feel that being the first mover is not necessarily an advantage. The success of the partnership will be related to three main success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating.Product Development: DiversificationJohnson and Scholes (2003) believe that changes in the business environment may create demand for new products and services at the expense of established provision. Ansoffs matrix also suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. In expanding and diversifying Pennys product mix, it is also crucial to implement internal development when new products are developed. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio. By following the changing needs of the customers Penny can introduce new product lines. This may require more attention to R&D, leading to additional spending.The retailing industry is experiencing overcapacity and innovative services and products being the major competitive advantage. Therefore, innovation has to be a major driver for Pennys product development. For example, Penny can develop a portfolio of different store formats in Germany, each designed to provide a different shopping experience. While the majority of Eastern European and Far Eastern outlets are hypermarkets, Penny can also develop different store types in these markets as well. This value added by the uniqueness will eventually lead Penny to command a premium price. The management of technological innovation is increasingly involved in strategic decision-making. Penny have to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained competitive advantage (Although a competitive advantage is the goal innovators want to achieve, the ability to create platform(s) depends on how they could manage the innovation. Nevertheless, it does not mean that the innovator has to possess all requisite capabilities, the important thing is the ability to organise and use the capabilities of others in order to create a business platform).Changes in the business environment may create demand for new products and services at the expense of established provision. Ansoffs matrix suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. In expanding and diversifying Pennys product mix, it is also crucial to implement internal development when new products are developed. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio.9.0 CONCLUSIONThe success of the Penny shows how far the branding and effective service delivery can come in moving beyond splashing ones logo on a billboard. It had fostered powerful identities by making their retiling concept into a virus and spending it out into the culture via a variety of channels: cultural sponsorship, political controversy, consumer experience and brand extensions.In a rapidly changing business environment with a high competitors pressure Penny have to adopt new expansion strategies or diversified the existing in order to sustain its leading market position in an already established retailing market. The company must constantly adapt to the fast changing circumstances. Strategy formulation should therefore be regarded as a process of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and execute these actions. The quality of a formulated strategy and the speed of its implementation will therefore directly depend on the quality of Pennys cognitive and behavioural learning processes.In large organizations as Penny strategy should be analysed and implemented at various levels within the hierarchy. These different levels of strategy should be related and mutually supporting. Pennys strategy at a corporate level defines the businesses in which Penny will compete, in a way that focuses resources to convert distinctive competence into competitive advantage.In large organizations as Penny strategy should be analysed and implemented at various levels within the hierarchy. These different levels of strategy should be related and mutually supporting. Pennys strategy at a corporate level defines the businesses in which Penny will compete, in a way that focuses resources to convert distinctive competence into competitive advantage.

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