Argos: Strategic analysis

Introduction  

Argos is the leading digital retailer in the UK. It offers about 33,000 different products in the market and enjoys a vantage position in the industry as an affiliate of Home Retail Group Plc, a giant retailer of home and general merchandise (Argos 2012). In addition to its online portfolio, Argos has 740 branches across the UK and it serves about 130 million customers through the stores. Its online portfolio is equally performing well with over 430 million website visits every year (Argos 2012). Even though the company operates in an industry where the level of rivalry is high, there are still plenty of opportunities that can be utilised. The macro environment has also been found to be moderately friendly to business practice. This paper conducts a strategic analysis of the company and recommends further strategies for the organisation.

External analysis      

An analysis of the organisation’s external environment culminates into the identification of the opportunities and threats that the organisation faces. This enables the organisation to formulate strategies that enable them tap into emerging opportunities, avoid threats or turn the threats into opportunities (Haberberg and Rieple 2007). The main strategic tools used for external analysis include the PESTEL model and Porter’s Five Forces model. PESTEL model is used to analyse the macro environment which examine political, economic, social, technological, environmental and legal factors.

The UK has enjoyed political stability as well as a commitment to the market economy by the political class for decades and this trend is expected to be maintained in the foreseeable future (Experian 2011). Economically, the market is recovering from a crippling financial crisis and the levels of disposable incomes are rising gradually. However, the economic growth rate remains low at less than 2% and this limits the growth potential of industry players (Deloitte 2012). The most notable social trend has been the wide acceptance of online transactions and e-shopping. Online shopping is growing twice as much as ‘brick and mortar’ shopping and this trend is projected to continue for the next decade. In fact, estimates are that online retail is bound to grow by 504% between 2012 and 2017 (Warc 2012). Besides, shoppers are increasingly attracted to the idea of finding the best deals online from the comfort of their homes and offices. Technological advancements have also been known to play a role in promoting e-commerce as secure money transfer and online payment technologies are developed for use over the internet and even on mobile phones (Deloitte 2012). Sensitivity to the sustainability agenda is characteristic of the UK consumer and organisations are always expected to refine their production and business processes to minimise wastage of resources.

Porter’s Five Forces examines the environment by focusing on specific industries where the players are the competitors. The five forces include: level of rivalry among current competitors, buyer power, supplier power, threat of entry, and threat of substitutes (Chorafas 2011). The main competitors are online retailers as well as traditional retailers with online portfolios such as Sainsbury, Asda, Tesco, Amazon and numerous other small retailers across the UK (Market Line 2012a). There is little variation over business processes and the product range and this heightens rivalry. However, Argos maintains an edge through its ownership of some popular brands such as Elizabeth Duke, Alba, Bush and others (Verdict Research 2012). Buyer power is moderate. It is lowered by the fact that customers are numerous as Argos serves over 100 million customers per year; and raised by the fact that such customers tend to be price sensitive and therefore likely to switch to competitors who price lower (Argos 2012). Supplier power is low and the threat of entry is high. Entry is made easy by the low cost of setting up online stores that do not require a lot of inventory. Moreover, the technologies needed to run online stores are easy to master. Substitutes to online shopping can be said to be the traditional ‘brick and mortar’ stores which are widely distributed across the UK (Market Line 2012a; Verdict Research 2012a). Their even distribution makes them more accessible and this could influence online shoppers to shop physically whenever they have the time. The threat of substitutes is therefore high.

The threats and opportunities can be summarised as below:

Opportunities	Threats
-          A recovering economy and rising disposable incomes in the market -          Higher demand for online shopping as the trend turns into a culture in the UK -          Sensitivity to the environment providing a chance for brands to improve their image as caring -          Technological advancements facilitating secure online transactions	-          Ease of entry of new players due to low costs -          Threat of substitutes with traditional shoppers still estimated to spend much more than online shoppers -          Heightened competition that could suppress profitability

Resources and key capabilities        
Barney’s resource based view of the firm outlines resources as assets that are either owned or within the influence of an organisation that can be utilised to yield a competitive advantage for the organisation (Barney 2010). Resources can either be tangible or intangible and they give rise to capabilities that can be utilised to make the organisation more competitive.

Tangible resources for Argos include finances, physical stores and delivery vehicles. Argos’ sales revenues in 2012 stood at £3.9 billion, an indicator that the company is financially sound (Argos 2012). A strong financial position provides research and investment capabilities and the organisation are in a position to maximise on opportunities arising in the market. The other tangible resource is the chain of physical stores distributed across the UK (Datamonitor 2012). Argos runs about 740 stores across the UK. These stores also serve as retail outlets where shoppers can do physical shopping. However, the general experience in the company is such that with the growth of the online portfolio, shoppers make online purchases only to collect the merchandise later. This practice has rendered many of the stores less busy and future projections are that the company’s use of the stores may be less efficient prompting the company’s decision to close about 75 stores located in areas where online shopping is most popular to avert underutilisation (MacDonald 2012). Nevertheless, these stores provide the company with the capability to physically serve customers and therefore be able to compete against retail giants such as Sainsbury and Asda effectively. Delivery vehicles are useful in ensuring timely delivery of merchandise purchased and this helps keep the business efficient in its service delivery.

The company’s intangible resources include its brand, technological knowhow, ownership of product brands, and its human resources. Brands tend to possess qualities that are compatible with human attributes and this makes it possible for relationships such as loyalty to be created in the market (Bettley, Mayle and Tantoush 2005). Argos is a well known brand in the UK and it inspires confidence in the market. Apart from its record in efficient service provision, the brand is associated with the commitment to the sustainability agenda as well as participation in community wellness programs that portray it as caring and reliable. Argos is also related to Home Retail Group Plc, a leader in the retail of household products in the UK. This association adds to the strength of its brand. The strong brand makes it possible for the company to inspire the confidence that is needed for the customers to transact online. The parent group employs over 50,000 employees in the UK and this makes it easy for affiliates to tap into the collective intelligence gathered from the market to introduce new products and services that could keep them ahead of the competition (Datamonitor 2012). Argos alone employees about 31,000 employees and this provides a rich pool through which customers can be served efficiently and create meaningful relationships with customers (Argos 2012). The employees are also well trained and highly motivated and this makes them able to provide unique experiences for customers.

In online retail, technological knowhow is essential. Customers need to experience convenience in shopping and in transacting for them to be inspired to continue doing business with an organisation (Experian 2011). Argos has with cumulative experience gained the operational and technical knowhow that is needed to successfully run an online retail portfolio. The company has had few if any cases of breach in data security and have satisfactorily user friendly platforms for the average shopper. Customers are there able to find their desired products with ease and transact online with confidence. The company also owns several famous brands. These exclusive brands including the Elizabeth Duke line of jewellery and watches have the capability of attracting and retaining clients in the organisation.

For a resource or capability to yield a competitive advantage for the organisation, it must be valuable, inimitable, rare and non-substitutable according to the VRIN framework. The competencies of Argos are as tabulated below:

Resources/ Capabilities	Valuable	Rare	Inimitable	Non-substitutable	Competitive Consequence
Ability to mobilise finances for investment	Yes	No	No	Yes	Competitive Parity
Research and development capabilities	Yes	Yes	Yes	No	Temporary Competitive advantage
Strong brand identity	Yes	Yes	Yes	Yes	Sustainable competitive advantage
Possession of famous brands	Yes	Yes	Yes	Yes	Sustainable competitive advantage
Possession of an elaborate chain of physical stores	Yes	No	No	No	Competitive Parity
Technological knowhow in online retail systems	Yes	No	Yes	Yes	Competitive Parity

Analysis of strategies and recommendations         

Strategies can either be implemented at the corporate level or at the business level. Corporate level strategies focus on the overall vision of the organisation while business level strategies focus on operational aspects aimed at reinforcing the corporate strategies (Bettley, Mayle and Tantoush 2005). Good strategies should be practical in light of the environmental factors (there should be a fit) where environmental factors influence the strategies to be embraced.

Argos maintains a physical presence through 740 stores distributed across the UK to complement its online portfolio (Goodley 2012). This strategic approach takes cognisance of the fact that even though online shopping is growing in popularity, the volumes of online sales are still much lower than those realised in physical stores and it’s therefore prudent to maintain physical stores as well. This approach is known as diversification.

Strategies can also be evaluated based on the Porter’s generic strategies model which outlines the main strategic approaches as cost leadership, differentiation, cost focus, and differentiation focus (Bonham 2008). In most cases, companies adopt a mix of two or more strategic approaches for different portfolios or brands. Cost leadership is applied where an organisation has absolute cost advantages over its competitors (Bonham 2008). For instance, where an organisation is able to obtain crucial supplies at a fraction of the competitors’ cost, it may opt to pass on the savings to the consumers through appropriate pricing strategies. Cost leadership is not practical in the case of Argos whose costs are at par with that of the competitors. The company concentrates on pricing most of its products competitively where many are priced close to the market average. This strategic approach is prudent in view of the fact that consumers in the market tend to be price sensitive and would switch to cheaper competitors if there was a significant price difference.

Differentiation is a popular strategic approach in industries where the levels of rivalry are very high (Chorafas 2011). Such industries are characterised by comparable product ranges as well as levels of operational efficiency with the difference between companies being difficult to detect. This is the scenario in the UK retail industry. With differentiation, organisations make efforts to come up with product lines that are unique and not possessed by any competitor in the market. Argos implements its differentiation strategies by maintaining unique company-owned brands of jewellery, watches and other merchandise (Argos 2012). The advantage of this approach is that once a famous brand is associated with the company, such a company gains a competitive edge over its customers. However, such an advantage can only be temporary as competitors are likely to create associations with other brands that may also be quite desirable in the market.

In the contemporary world, differentiation is done through service delivery (Market Line 2012). Services are heterogeneous and the amount of satisfaction generated tends to be dependent on the nature of the interaction between the clients and the employees. These unique interactions can be created through training and motivation as well as the creation of a unique organisational culture that motivates employees to do their best in pleasing the customers. This is the focus of Argos where substantial investments are made into ensuring that the potential of the workforce is harnessed (MacDonald 2012). The motivated employees in turn contribute to making clients satisfied in a manner that is unique to Argos. This is a good strategy when evaluated against the fact that competition is stiff and it is therefore important that uniqueness be brought out.

The other form of differentiation is through the use of the brand. Brands are unique resources which can be used to create lasting relationships with customers. Argos has over time strived to portray itself as a reliable brand that also cares for the welfare of the community through extensive involvement in community wellness programs and the implementation of an elaborate strategy to promote environmental conservation (MacDonald 2012). It also seeks to promote brand loyalty through loyalty schemes that rewards consistent shoppers with discounts and other rewards such as prizes given occasionally (Argos 2012). The loyalty schemes approach is common in the retail sector in the UK. However, the results of such schemes are dependent on the brand identity hence the justification in strengthening brands. Even though Argos appears to largely embrace differentiation, the reality is that it implements a hybrid of both differentiation and cost leadership approaches. Its 2012 announcement that it would close some of its stores is indicative of the fact that the company is keen on keeping its operation costs as low as possible in order to have a competitive edge.

In a slow-growth economy like the UK and where competition in the industry is very high, it is recommended that organisations seek further growth by either expanding internationally or pursuing a blue-ocean strategy. A blue ocean strategy would focus on introducing a product or service that is non-existent in the market and whose provision would therefore not be subject to competition. This would allow room for premium pricing and greater profitability. International expansion on the other hand allows organisations to grow further by exploiting the dynamics of growing economies. On the whole, the growth potential for Argos is limited by rivalry and slow economic growth and it cannot experience superior growth under the circumstances. Argos can therefore enhance its growth by either expanding internationally or generating a product/service in line with the blue ocean strategy.

Conclusion

The hybrid strategic mix adopted by Argos appears to be dominated by the tendency to differentiate. This is done through possession of unique famous brands such as Elizabeth Duke like of jewellery. It is also done through an elaborate brand strategy aimed at promoting brand loyalty as well as focus on the employees whose unique contributions cannot be replicated by competitors. This strategic approach sounds reasonable in view of the fact that industry rivalry is very high. However, the growth potential of the organisation is still suppressed under the economic conditions and industry rivalry. This is why the blue ocean and the international expansion strategies have been recommended as suitable options to ensure accelerated growth of the company in the future.

References

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