Waterstones - Industry Analysis - Case Study Example

Strategic Report of Waterstones: Introduction: Waterstones is a leading UK based book retailing company established in 1982 by Tim Waterstone. The firm has over 300 stores and operates in a global retailing market. Waterstones is therefore confronted with tough competition and uncertainty that is characteristic of the globalized environment, (Thompson, 2010, 54). For this reason, Waterstones must put in place streamlined strategies that would help it thrive in the competitive and highly volatile market in both the short-run and long-run situations. Although Waterstones is the UK’s leading book retailer, major competitors including Amazon and WH Smith hold substantial market share and need not be taken lightly. It is important that Waterstones understand the environment within which they operate, (Clark and Phillips, 2013, 237). This essay makes an analysis of both the external and internal environment within which Waterstones operates. This presents the PESTEL framework, a SWOT analysis, Porter’s five forces framework and Waterstones marketing strategy hence considers the distinctive capabilities of Waterstones. Industry Analysis: External Environment The bookselling business within the global framework is such that the macro environment defines the trends in the market. In other words, no single company is in control of the business environment. It means therefore that Waterstones need to focus her strategies along the PESTEL factors in order to remain competitive and attractive globally. Understanding the external factors is important for Waterstones to be able to plan effectively and make strategic decisions that would sustain her in the fast changing competition dynamics, (Nwagbara, 2011, 14-26). PESTEL Analysis Political Factors: It is important to note that political factors have a significant bearing on how any given company grows her business. They determine how business is regulated and influence the spending power in the economy. It becomes more complex in a case where the company does her business in different countries since one has to adhere to the political requirements of each single country. Other than the United Kingdom, Waterstones conducts her business in a number of countries including Republic of Ireland, Brussels, Amsterdam and the Netherlands. Business highly depends on the stability of the political landscape. Government policy keeps changing from time to time and with the various administrative regimes. For instance, if government decides to increase corporation tax, it becomes more expensive to do business. Other political factors that would impact business would include; government policies regarding culture and religion, marketing ethics and trading agreements, (L a r n e r, 2009). In the United Kingdom, the political environment is relatively friendly for the bookselling industry because the UK government derives huge amounts of revenue from book publishing and bookselling. However, the high discounting policy of government has for a long time weakened sales of Waterstones and other book retailers because this ultimately created a cut throat competition pressure between supermarket chains. In the international arena, the bookselling industry is faced with a major challenge of piracy. This is due to the general lack of a united front or a common political framework within which to address the piracy issue and regulate book retailing business. This means that Waterstones may encounter low sales in the global community due to these difficulties, (Nwagbara, 2011, 14-26). Economic Factors: Waterstones bookselling business heavily depends on the UK market economy. Market demand, cost of goods, pricing and profit margins are all determined by the prevailing economic factors. Some of the key economic factors which Waterstones need to monitor closely include; the economic growth patterns, interest rate levels, inflation trends, the tax policy and the exchange rates. High unemployment levels mean low aggregate demand for goods and services. In order to reduce the high levels of unemployment, the UK government at times extends subsidies on business. Where government decides to increase the interest rate, it becomes more expensive to borrow money necessary for investment. High interest rates also reduce expenditure by consumers and ultimately translate to low business. Economic recessions also impact heavily on most businesses. For instance, in 2009, a 0.7% decrease was recorded by the UK bookselling industry compared with the 2008 sales. This decrease in sales would be attributed to the economic recession among other factors, (Nwagbara, 2011, 14-26). Social and Cultural Factors: Human behavior is a product of perceptions and attitudes which are largely influenced by the environment in which they live. These guide the way people interact and relate to each other in society. It means that business groups like Waterstones need to understand and appreciate the social and cultural fabric of the society in which they do business. This would help facilitate the making of strategic marketing decisions. It is important to understand among other things; how consumers spend their leisure time, the general population age structure, believes and attitudes of the people regarding foreign or new products in the market, and even the religious beliefs of the people, (The Decision Group, 2010). Consumption patterns change not only with time, but with style and fashion. Waterstones bookselling business for instance has to adjust to the internet driven change in consumer patterns in the UK and elsewhere across the globe as consumers embrace the digital age. This means that there is an increasing market of e-books. An important point for Waterstones to note is that various age categories prefer reading certain different books. Therefore differentiation based on the understanding of both age and gender preferences would help keep her in the market, (The Decision Group, 2010). Technology Factors: One of the most critical factors to watch in the global business arena is the rapidly advancing technology. In the bookselling industry, technological advancement has seen the advent of digital technology where almost everything is going the electronic way. There has been a growing trend towards audio books following the iPod/iPhone developments. The web has made communication easier, faster and affordable. At the same time, this has greatly inspired more people to venture into self-publishing because of the ease with which downloads and print have become. Stocking and distribution has also been aided by technological development that as seen growing use of electronic funds transfer as well as electronic point of sale that are more efficient. Waterstones has taken advantage of this to provide Sony’s e-reader device. Furthermore, Waterstones has taken advantage of the social networking platform to market her products on both Facebook and twitter, (Greenfield, 2013). The competitors are also doing the same using different electronic formats. Therefore Waterstones needs more creativity and distinctive capability in order to remain attractive and relevant. It takes continuous research and effort to understand the market needs if one has to remain competitive. Ethical and Environmental factors: Waterstones need to observe and adhere to various ethical issues in the environments where they do business. The rapid expansion and multiplicity of web portals in itself has presented the ethical issue of illegal and free e-book downloads. This is also an obstacle in the way of e-book retail due to the unfair competition platform among the retailers. Whereas environmental preservation and protection is an ethical issue, the uncertainty presented by climatic changes is a global challenge especially considering the issue of global warming. This has significant bearing on costs and pricing of books due to transport costs involved hence their demand as well. Again, economies would want to invest in environmentally friendly projects hence impact significantly on book production. For these reasons, Waterstones has teamed up with the British Safety Council in dealing with carbon emissions issues and is represented on environmental action groups such as the Booksellers Association and Publishers Association aimed at reducing negative environmental impact, (Nwagbara, 2011, 14-26). Legal Factors: Legislation is the key factor regulating business conduct in any economy. Different regimes also tend to change legislation once they ascend to power. Legislation covers the business licensing criteria as well as planning authorization. The UK government has laws in place curb against extortion by monopoly firms ensure fair competition and guard consumers against fraudulent product descriptions among other unfair business practices. In the global context, bookselling faces the challenge of varying copy right laws that are unique to every country. Unlike the 1980s where retail prices were bench marked by the Net Book Agreement, the UK today no longer subscribes to the limited discounting models and this has created unending price battles in the bookselling industry to the advantage of hypermarkets that can afford selling at substantially lower prices hence putting the smaller retail sellers at risk of leaving the industry, (Office of Fair Trading, 2008, 63-76). Industry Analysis – Trends: It is necessary that Waterstones understand the trends in the book selling industry both past and current so that informed decision making is facilitated regarding planning for future competitive strategies. Waterstones depends mainly on the UK market. However, this report not only makes a trend analysis of the UK market, but also touches on the US and other economies in the global arena. Analysts have argued that the past five years have witnessed serious errors on the part of book retailers. According to IBISWorld (2013), book retail sales are expected to reduce at on annual rate of 12.9%. Similarly, Verdict Research & SAS (2012) had forecasted that the year 2013 would see a 4.6% overall contraction in the UK book market, but with online overtaking bricks and mortar retail channel. They argued that a fall in sales would be generated by the growing number of e-reader ownership, (Verdict Research & SAS, 2012, 17). The industry players have encountered quite some difficult business landscape confronted with the problem of growing competition pressure to the industry emerging from external players including departmental stores and supermarkets. In fact, projections by IBISWorld (2012) indicated that book retail sales were to drop to $985 million representing a 3.9% drop. The situation is complicated further by the austerity measures adopted by the UK government the impact of which is to cut reduce consumer incentive to spend. The UK government’s policy aimed at increasing tax and reducing public benefits will negatively affect the book retailing industry because people’s disposable incomes will be under more pressure, (Wischenbart, 2011, 19-23). Figure 1 shows the retailer share of books bought by UK consumers between 2010 and 2012. For the US market, the trend is shown by Figure 2 and Figure 3. The fact that e-book sales were forecast to do well, it is expected that the downward trend in the book retailing market will persist over the next five year period extending to 2018. This is because e-book may not generate extra demand enough to get the industry back to the desired growth curve. Book retailing firms like Waterstones may continue losing their market share to external players. On the positive side however, the expected decline in sales is expected to be relatively weak compared to the sales recorded over the last five year period. There has been consistent consolidation effort in the industry which has seen retailing gain a medium level share of the market. With Waterstones and WH Smith being the largest book retailers in the high street segment, 70% of the industry revenue is attributed to the top four book retailers, (IBISWorld, 2012). Figure.1 Figure.2 Figure.3 Internal Environment- The SWOT Analysis of Waterstones: The SWOT analysis is an important tool to analyze the internal environment of any given business to reveal the strengths and weaknesses which then is measured against the opportunities and threats presented by the external environment. Strengths: Waterstones has built a strong brand image and brand presence in the bookselling industry being the UK’s leading book retailer both online and in the high street. This has been a result of concerted effort on the part of Waterstones marketing team to deliver great value to their customer satisfaction that has in turn ensured customer loyalty. Waterstones has for a long time maintained good relationship with not only her clients, but also with publishers and other online retail sellers, (Thompson, 2010, 54). It is important to note that Waterstones has also maintained a clear retail sales strategy due to her exclusive retail commerce knowledge that has given her a competitive edge in the market. The firm has also one of the best websites Waterstones.com which was awarded a silver badge in 2008 at BT online excellence awards. In the same Year 2008, Waterstones pioneered the selling of Sony Reader e-books in the United Kingdom, (Neill, 2008). Weaknesses: One of the weaknesses of Waterstones is her concentration and reliance mainly on the UK and US markets. The firm has failed to penetrate other markets such as the Asian market. Waterstones has failed to take maximize on her sales in the face of competitor withdrawal from the industry. The firm has been faced with a challenge of high marketing costs leading to low profitability and long term debts. Waterstones image has also been attacked by allegation of scandal payments advanced to publishers to have them suggest Waterstones books, (Nwagbara, 2011, 14-26). Opportunities: Opportunity still exists for Waterstones to diversify her business through venturing into other events and activities that are related to book business. These include the support of literature festival and production of resource guides for different reader categories such as children and the elderly. To this end, Waterstones has been supporting Dyslexia Action as their charity since 2003. Waterstones has taken advantage of the holding opportunity to provide support to at least eighteen festivals in UK. Waterstones has the opportunity to expand her sales through online selling of MP3s and DVDs other than e-books. The international market is another opportunity for Waterstones, (Thompson, 2010, 54). Threats: The most obvious threat for Waterstones is to do with growing competition either from new entrants or traditional sellers or both. The bookselling industry is characterized by similar but differentiated products among the competing firms. As brands increase, differentiation may not be an effective competitive strategy. Waterstones need to think innovatively to introduce their own new and unique brands into the quick changing market. Other threats for Waterstones are to do with weakening customer relationships as well as the seasonal nature of the Waterstones events. These threaten future business stability and have to be addressed, (Dobson and Waterson, 2007, 935-62). Marketing/Competitive Strategy – Porter’s Five Forces: Porter’s Five Forces model is an essential tool that has been widely used by business organizations to help evaluate their entrepreneurial strength, organization’s market advantage and profit prospective. Waterstones need this to put the firm in a better position to formulate her marketing strategies that would deliver valuable competitive advantage. Competitive Rivalry: Waterstones faces strong rivalry in the book retail market both in the high street and online book retailing. Her major rivals in the UK are Amazon and WH Smith. Waterstones and her rivals find themselves in a difficult situation since they use similar strategies to sell similar products. There is need for focused relationship marketing for Waterstones to retain her customers. Other than product differentiation, targeting different market segments would also help reduce unhealthy rivalry, (Dobson and Waterson, 2007, 935-62). Threat of New Entrants in the Industry: With the rapid technological developments, new firms will always want to join the book retailing industry to have a share of the prevailing profits and high market demand. This is likely to have an erosion impact on the dominance position that Waterstones have continued to enjoy especially in the UK market. However, Waterstones have maintained a strong brand awareness and good customer relationship which they should strive to maintain. Economies of scale would be in favor of Waterstones against the new entrants in the industry, (Nwagbara, 2011, 14-26). Threat of Substitutes: This is related to the threat of new entrants since the new firms in the book retailing market may come up with better alternative ways of doing the same business and this would definitely work against the existing firms. For instance, the advent of e-book itself creates opportunity to have different alternative product sources. This is why Waterstones need focus on her distinctive capabilities in order to remain more attractive, (Nwagbara, 2011, 14-26). Bargaining Power of Suppliers: It is possible that major book retailers can have their bargaining power with suppliers weakened because of the inherent fear to lose key suppliers to the bigger book sellers. Waterstones has however demonstrated her consistency in supporting independent publishers because of their crucial role in books and literature development, (Office of Fair Trading, 2008, 63-76). Bargaining Power of Customers: Depending on the type of product and target market, customers may force an organization to lower its selling prices in the market. However, Waterstones being a retail business depends mainly on consumer-market segment that rarely wields sufficient bargaining power to force down the prices in the market, (Office of Fair Trading, 2008, 63-76). Waterstones Distinctive Capabilities: The bookselling industry is distinctive. This is because it is the single most widely published source of information and literature around the globe. Furthermore, the industry derives enormous benefit from technological development especially the internet that makes it easier for the industry players to serve the wide customer base across the globe. For Waterstones, her first distinctive capability is innovation. Having merged with HMV, Waterstones have undertaken massive and costly yet risky innovation projects such as the ‘loyalty card’ which her competitors would not readily venture into. Secondly, Waterstones has built a very strong reputation that cannot be easily diminished. Third, Waterstones has architecture as a distinctive capability whereby the firm adopts new technology faster, easily and efficiently. Finally, Waterstones’ principle of decentralization is her distinctive capability in the industry. Waterstones believe that each one of her branches should be allowed to make own buying decisions consistent with local customer demand because at the end of the day, each branch belongs to the lager community. In other words, every branch has the ‘freedom to act’, (Thompson, 2010, 54). Figure 4 illustrates the supply chain of Waterstones. Source: Source http://businesscasestudies.co.uk/waterstones/decentralisation-within-a-book-retailer/career-development.html#axzz2mgbeHtT5 References Clark G, ‎ Phillips A, (2013), Inside Book Publishing, NEW YORK: Routledge. P237 Dobson, P W., and Waterson, M,(2007), 'The competition effects of industry-wide vertical price fixing in bilateral oligopoly' International Journal of Industrial Organization, 25, 935-62. The Decision Group (2010) "PEST: Political, Economic, Social, and Technology Analysis". Retrieved 2010-01-19 from http://www.decide-guide.com/pest.html. Greenfield J, (2013). E-Retailers Now Accounting for Nearly Half of Book Purchases by Volume, Overtake Physical Retail, March 18, 2013, Available at  http://www.digitalbookworld.com/2013/e-retailers-now-accounting-for-nearly-half-of-book-purchases-by-volume/ IBISWorld, (2012) Industry Report - Industry Investment Chapter, available at http://www.ibisworld.co.uk John B. Thompson – 2010, Merchants of Culture, London: Polity Publishers.p54 L a r n e r , C. (2009) Waterstones and the environment. Available from: http://www.waterstones.com/waterstonesweb/.../Waterstones-environment. Neill G. (2008) Waterstones staff get Selling. Retrieved 2010-01-19 from http:/thebookseller.com/news/52431-watestones-staff-get-selling.html. Nwagbara U, (2011). Waterstones and the Changing Bookselling Environment in the UK: the Journey so far and Prospects Economic Sciences Series Vol. LXIII No. 3/2011. pp14 – 26 Office of Fair Trading, (2008). An evaluation of the impact upon productivity of ending resale price maintenance on books, pp63-76, available at www.oft.gov.uk/advice_and_resources/resource_base/economic-research Verdict Research & SAS (2012). How the UK Will Shop in 2013, pg 17, available at www.sas.com/offices/europe/uk/downloads/.../retail-predictions2013.pdf‎ Wischenbart R, ( 2011). The Global EBook Market: Current Conditions & Future Projections, London: O'Reilly Media, Inc., p.19-23 Y a n g , L. (2009) The effect of the Internet in the book retail market. Asian Social Science, 5, 2, 90-92. Read More