The choice of the strategy an organisation is having has always been a matter of high importance ever since the very incipient forms of a business, and by strategy we mean all the decisions taken in a certain direction in order to both fulfill the needs of the market (customers) and contribute to the welfare of the stockholder (owner). On a similar note, Chandler said: “Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals” (Chandler 1962). Behind the effective allocation of any kind of resources the main aim of any company and the concept that keeps it running is the satisfaction of their customers’ needs. In 1943, Maslow creates the hierarchy of needs, stating that individuals must satisfy lower level deficit needs (food, water, rest) before progressing on to meet higher level growth needs (safety, esteem, belongingness).
Among these, the one need that is nowadays mostly satisfied by smaller or larger enterprises is food. The food retail industry, representing 19% of the UK’s total manufacturing sector, is a high competitive market and in a continuous change, where the process of selling involves studies of psychology, science and business, which seek to know the tastes, habits, needs and way of thinking of consumers (Mártinez, 1997). Supermarkets and hypermarkets, since they appeared, have played a key role in the food industry given the fact that they deliver services that take into account demand, supply and proximity.
But the entrance of new products, modification of the old ones, subcategories, new technologies, market niches, media channels, Internet, the rise of new concurrence, trends and political crises, they all happen so fast. This results in a food market that is not only dynamic but risky, complex and cluttered (David A in “Strategic market management: global perspectives”, p.13). Strategy creation and implementation is a lot more difficult given this environment and in order to succeed a PESTEL analysis is usually carried out. PESTEL analysis stands for Political, Economic, Social, Technical, Environment and Legal and is particularly used when it comes to analysing the key features of the external environment, factors that are outside the control of that company J Sainsbury Plc. was founded in 1869 by John James Sainsbury.
In 1922, it became the largest grocery retailer in the UK. Currently Sainsbury’s is the second largest chain of supermarkets (with 16.9% share in the supermarket sector in the UK), just behind Tesco (with 28.4% share). In May 2017 there were counted over 1415 stores, including many subsidiaries such as Sainsbury’s Bank Plc., Sainsbury’s Supermarkets Ltd, Sainsbury’s Convenience stores, Home Retail group (Argos & Habitat) and Tu. With stores all over UK and Ireland, the giant’s performance is directly affected by the political factors in the area.
In June 2016, Britain voted to leave the EU causing a heightened level of regulatory uncertainty in the country. Unsurprisingly, Brexit has sparked political turmoil across the UK with Scottish Prime Minister Nicola Sturgeon still calling for a second Scottish independence referendum to protect Scottish interests in the EU since majority of Scotland voted to remain (Douglas and Gross 2016). In this situation, negative trading performances across the sector were expected, fuelled by the statement of the former CEO of Sainsbury’s: “One can say very clearly what the direction will be: higher prices, less choice, and poorer quality, because all of those dimensions have been improved by these open trading relationships that we have had over the last 40 years.” (Justin King, 9/07/2017).
Closely connected to these changes are the economic factors; immediately after UK left the European Union, the pound sterling fell to its lowest against the dollar for 31 years, affecting all the imports and exports and therefore, the supply across all the stores in the country. Other factors that can affect the activity of a supermarket from the economical point of view are the unemployment rates in the country, the level of the interest rate, taxation and the amount a consumer is willing to pay (wages). When it comes to social factors, we all noticed in the last few years an increasing interest for organic and whole foods as people are changing their lives, pushed but governmental authorities too. Being vegetarian or vegan is a matter of high importance for food producers and distributors as such a health-conscious population needs a supermarket to offer healthier options. Sainsbury’s started delivering a real impact on the nation’s health in 2011 by reintroducing their premium range ‘Taste the difference’, including over 1000 products. Through the years they maintained the health-friendly image by increasing the focus on localism, partnering with British farmers and growers to offer consumers a wide selection of British products , by investing in their own brand offer and in fresh and hot food counters and ultimately, in 2017, by changing the focus on allergen-free and dairy-free food (this is how ‘Deliciously Freefrom’ and ‘On the go’ ranges have been created). They have also carried sugar cutting measures, reducing it in the cereal content by an average of 13%. The way a supermarket chain is using its technological resources is vital in an era where research, advertising and the use of computers usually has a huge impact on a business.
Part of being a national wide retailer means keeping track of the inventory in multiple places at the same time, a thing that is impossible to do only manually. In order to keep up, diminish the rate of human errors and reduce the amount of paperwork, Sainsbury’s is constantly updating its technologies by introducing self checkout machines, computerised stock counting, better scanning systems, using the collected data to derive consumer retail insights and, more recently, the alternative of online shopping. Because it is an industry of main interest, the food industry is well bounded by many laws and conditions in order to assure the wellbeing of its customers. Some of the current legislations that Sainsbury’s has to pursue in order to avoid any type of negative consequence include the minimum wage policy, the consumer law, the competitor law, alcohol selling age legislations, discrimination and fair treatment terms, health and safety regulations, mandatory food tests etc. The PESTEL analysis is a business tool that is concerned with the effect of different types of factors in order to determine if the environment is stable enough and appropriate for running activities that generate higher profits.
Since the main focus is on external factors rather than internal ones, one of the problems that firms encounter when using this tool is the lack of control over the actual factors. For example, the analysis will include the level of unemployment, taxations, government policies and the state of inflation, but because of the complexity of the macroeconomics environment a firm can only make assumptions that might change in the short run causing uncertainty and lack of stability. Some factors (political stability, currency or environmental issues) might change in less than a day’s time and even with all caution and assessment the business remains at risk.
This is why simply listing the factors can be also seen as a drawback, unless the attributing factors suffer a more in depth examination. A more accurate research means collecting a considerable amount of data, gaining access to extensive external data, demarcating the factors and prioritising them in terms of degree of impact, things that require outsource experts and, of course, added costs and capital. One political event that was slightly difficult to predict and had a capital impact over the UK economy and the food retail industry was the decision to leave the European Union. The UK’s supermarket chains had to face higher import costs following the fall in the pound against the dollar and the euro. According to Kantar , food inflation has doubled to 1.
4% in the month after Brexit as the cost of everyday staples rose, suggesting that household budgets came under more pressure. Sainsbury’s has warned that the impact of cost pressures from the post-Brexit vote decline in the pound remains uncertain as it reported a slight fall in sales at its supermarkets. The new chief executive of Sainsbury’s, Mike Coupe, has warned major suppliers that they should be taking the hit on any cost increases resulting from the falling value of the pound, rather than trying to pass on price rises to retailers and shoppers. “Our job is to do everything we can in the supply chain to mitigate those cost price rises for our customers,” Coupe added. In order to do that, he fought back against widely reported price rise demands from large grocery brand owners, such as Unilever, Birds Eye and Pepsico. Another measure taken in order to reduce the uncertainty caused by external factors was directing more resources and investing in Argos, a retailer recently bought by Sainsbury’s in a £1.
4bn deal. Without the contribution from Argos, Sainsbury’s profits for the second half of the financial tear would have been even lower due to the effects of the inflation rise. The supermarket chain, that was already owning 41 Argos outlets inside their stores, takes the decision to open 250 new ones in the next three years, 25 of them being planned for the next quarter.
John Rogers, the foster finance director of Sainsbury’s becomes the chief executive and starts a remarkable nationwide tour in an attempt to boost staff morale and improve customer service. ‘That growth story and the strengthened buying power of Sainsbury’s, which now combines its £2.5bn of clothing and home sales with Argos’s £4.
1bn total sales, should help the group to cope with suppliers keen to raise prices following the EU referendum and the slump in the value of sterling.’ PESTEL analysis, as it stands, is a managerial tool that offers an insight in the Political, Economic, Social, Technological, Legal and Environmental factors of an economy and it mainly provides a general idea about the macro environmental conditions and if they are appropriate or not to achieve the targets and goals of that company. However, its accuracy and effectiveness depends on the data collected, timely updates and surveys to accommodate changes and the use of additional tools that can trim down the limitations of a PESTEL analysis to some extent. It guides the companies to improve performance.
In order to minimise the effect these drawbacks can have over the performances of a business, a PESTEL analysis should be combined with other techniques. SWOT, for example, is very useful for assessing weaknesses, strengths, flaws and limitations from an in-the-company point of view, so that it can build up on its good points and take a second look at the downs. Overall, we can see how PESTLE and SWOT techniques are useful when it comes to strategic planning in the long run and why their implementation at the same time is essential in order to evaluate their performance and most important, improve it.