Analyzing the Safeway Business Model In a Time of Economic Change
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Analyzing the Safeway Business Model In a Time of Economic Change

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This is the written portion of a group project that was for my MBA class, Seminar in Organization Design and Change.

This is the written portion of a group project that was for my MBA class, Seminar in Organization Design and Change.

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  • Did you look at the date of the paper? It was done 4 years ago.
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  • Why isn’t Safeway going for other strategies like Market Development? The US has been facing difficulties in Economic recovery as unemployment rate is still around 7% and GDP growth is still modest. The Number of jobs added in the month of February was 175000 which is less than expected.http://bit.ly/QNSdp6
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Analyzing the Safeway Business Model In a Time of Economic Change Document Transcript

  • 1. Analyzing the Safeway Business Model <br />In a Time of Economic Change<br />Management 842: Seminar in Organization Design and Change<br />December 15, 2010<br />Spencer Jaffe<br />Debbie Kane<br />Nadia Pelegouzova<br />Vinay Prabu<br />Natacha Yarbrough<br />I.A. Safeway Background<br />Headquartered in Pleasanton, California, Safeway was founded in 1915, by M.B. Skaggs and is the largest grocery store chain in the United States. A strategic and astute businessman, Skagg’s was able to expand Safeway by meeting his customer’s needs while keeping prices low. He saw his business grow in the 1930s by introducing new innovative business strategies such as pricing by the pound, dating perishable items, and providing nutritional labeling. Today Safeway has a number of specialty departments such as delicatessens, bakeries, and pharmacies. Safeway also leases space to co-brand with other well known companies such as Wells Fargo and Starbucks Coffee. <br />Safeway’s slogan is “Ingredients for life.”The Safeway stores offer their own product lines, which includes “Select,” “O’ Organics,” and “Eating Right.” These exclusive Safeway product lines offer quality items that are less expensive alternatives to the brand name products. In addition, the company owns an online grocery website and subsidiaries which provide third-party gift cards, prepaid cards, and telecom cards to North American retailers for sale to retail customers. As of 2009, Safeway had 1739 stores and 186,000 employees as of 2009.<br />Safeway’s vision statement promotes its interest in corporate social responsibility and sustainability: “Safeway will be the premier retailer in the grocery sector with an unrivaled reputation for pursuing ethical business practices. Known for balancing customer choice with the rapidly changing needs of the community and planet, Safeway is fully engaged in making a measurable difference in this important “sustainability” journey - and is recognized for our willingness to adapt the business appropriately”.<br />Like most corporations over the past three years, Safeway has experienced revenue losses. Safeway’s most recent financial statements reveal an operating loss of -$1097.5 million in 2009. Its profit margin was reduced to an unsustainable level of -3.1% while revenue stands at around $40 billion annually.However Safeway’s current CEO, Steve Burd, who has been with the company since 1993, says Safeway’s recent low performance shouldn’t faze the public. “Our results of the year (2009) underscore our ability to weather a tough economic environment.”<br />I.B. Safeway SWOT/TOWS analysis: (See Exhibit 1 for Safeway SWOT/TOWS Matrix)<br />Internal Strengths<br />1) Leverage with suppliers: As one of the largest retailers in North America, Safeway has leverage with the suppliers. It can negotiate better supply contract terms and better prices.<br />2) One-stop shopping: Safeway provides a wide variety of products: food, cleaning supplies, cosmetics, etc. Many stores have a Wells Fargo bank outlet, a Starbucks, and a fuel station.<br />3) High quality products: Safeway owns 17% of its plants (for the private Safeway brands), which allows it to have a better control over the quality of the products.<br />4) Sustainable practices: Safeway expanded its sustainable foods and household goods offerings. It also partners with local suppliers of fresh produce in California. Safeway is remodeling some stores to make them use natural light, use less energy, etc. <br />5) Multiple locations: As of 2010, Safeway operates 1,725 stores in the United States and Canada.<br />6) Innovation: Safeway developed an online delivery system where users can create personalized shopping lists. <br />Internal Weaknesses<br />1) Substantial indebtedness: “We currently have, and expect to continue to have, a significant amount of debt, which could adversely affect our financial health. This substantial indebtedness could increase our vulnerability to general adverse economic and industry conditions.”<br />2) Relative inflexibility: As a large company, Safeway may be unable to react to changes quickly.<br />3) Consistency in service: Having many stores may make it difficult to ensure that all of its stores are managed and operated according to Safeway’s high standards of quality. <br />4) Unionized employees: Unions subject Safeway to potential strikes and work stoppages. <br />External Opportunities<br />1) New customer needs: Safeway could develop new sources of revenue from new product offerings, like its gift card business and exclusive brands such as O’ Organics, Eating Right, and Lucerne.<br />2) Growth of consumer sustainability awareness: Safeway could further emphasize its sustainable practices.<br />3) E-retail growth: Because of an increasing number of consumers buying groceries online, there is an opportunity for Safeway to expand this area.<br />External Threats<br />1) Competition: Safeway faces intense competition from traditional grocery retailers and non-traditional competitors such as supercenters and club stores.<br />2) Bargaining power of consumers: Adverse publicity about food safety and quality may discourage consumers from buying Safeway products.<br />3) Economic conditions: When the economy is bad, consumers shop less and look for the cheapest products. Suppliers may be raising prices as well during difficult economic times.<br />4) Government regulations: Safeway must comply with multiple governmental regulations, and new regulations may impose new costs on Safeway.<br />5) Narrow margins: The grocery retail industry is subject to narrow margins.<br />TOWS Analysis:<br />Maxi-Maxi Strategy (4S/2O): By continuing its sustainable practices and increasing advertising of these practices, Safeway would reinforce its sustainable business reputation and attract environmentally conscious customers and partners. Such approach will result in increased profits through increased revenues (more customers) and lower costs (energy efficiencies). <br />Maxi-Mini Strategy (6S/1T): By using its expertise and innovation, Safeway can better compete in the market (for example by offering new services or new and better products to consumers).<br />See Exhibit 2 for more information on Safeway SWOT/TOWS.<br />IC: Whole Foods Background<br />Headquartered in Austin, Texas, Whole Foods was founded in 1978 in by 25 year old John Mackey. With a loan from family and friends, Mackey opened a small health food store. In 1980, he moved the small but growing natural foods store to a 12,500 square foot facility with 19 employees and changed the name to Whole Foods Market.<br />Whole Foods Market, Inc. owns and operates a chain of natural and organic foods supermarkets. Its products include traditional items as well as specialty products. The company has built a strong public brand on emphasizing "natural" and organic products. In 2003, Whole Foods became United States' first national "certified organic" grocer. They placed third on the US Environmental Protection Agency’s list of the Top 25 Green Power Partners.<br />Whole Foods’ mission statement is quite long and covers the following topics: Selling the Highest Quality Natural and Organic Products, Satisfying Customers, Supporting Team Members, Profits & Growth, Community & Environment, Partnerships with Suppliers, and Healthy eating education. Whole Foods only sells products that meet its quality standards for being "natural", which the store defines as “minimally processed foods that are free of hydrogenated fats, artificial flavors, colors, sweeteners, preservatives and many other harmful ingredients.” Whole Foods Market has also announced that it does not intend to sell meat or milk from cloned animals, even though the FDA has ruled them safe to eat. It sells many USDA-certified organic foods and products that aim to be ecologically responsible. <br />Whole Foods has seen some growth, along with minimal losses, in recent years. Whole Foods posted earnings of $57.5 million or $0.33 EPS for the fourth quarter of fiscal year 2010, beating analysts’ expectations of $0.28 EPS. Sales also jumped 15% to $2.1 billion. Whole Foods reported an 8.7% increase in same-store sales, as the company slashed expenses and revamped its pricing to focus on value.<br />As of 2009[update], Whole Foods, Inc operates 302 stores throughout the United States and United Kingdom.A.C. Gallo is the President and Chief Operating Officer. John Mackey and Walter Robb each hold the positions of Co-CEO. Gallo has been with the company since 1992. <br />
    • Whole Foods SWOT/TOWS Matrix
    • 2. See Exhibit 3 for the Whole Foods SWOT/TOWS Matrix
    • 3. Internal Strengths: Whole Foods offers a variety of healthy products, and has a reputation as an organic and sustainable store which offers a unique shipping experience. Whole Foods has been growing steadily over the past four years.
    Internal Weaknesses: Whole Foods has a reputation of being more expensive than other stores. It is also fairly decentralized: “The majority of our purchasing, particularly in the center store, occurs at the regional and national levels.”<br />
    • External Opportunities: Opportunities include expansion both in the US and abroad and offering new products. Lower real estate prices can definitely help expansion. Growing consumer concern with health and quality of food is also a big opportunity for Whole Foods.
    External Threats: Threats include economic conditions, competition, and unions.<br />TOWS Analysis:<br />Maxi-Maxi (S1/O1): Using its unique products and store layout to continue to build its reputation, expand, and grow.<br />Mini-Mini (W1/T1): Reducing the high price weakness and avoiding the competition threat. The competition is known for lower prices, Whole Foods may need to have a set of products or incentives that match these lower costs, bringing in more price sensitive customers. <br />For more information on the Whole Foods TOWS analysis, see exhibit 4.<br />I.D. Comparative Analysis<br />In comparing Safeway to Whole Foods, there are similar external factors such as competition, economic conditions, government regulations and the bargaining power of consumers. Both companies have experienced financial difficulties due to the recent economic turndown. <br />Internal differences include the level of unionization among employees, pricing, quality of products, and distribution networks. For example, Safeway is heavily unionized while Whole Foods management has shown unwavering resistance against unionization. On the issue of pricing versus quality, Safeway has garnered a loyal following with their “everyday low pricing,” whereas Whole Foods’ reputation for high quality items has not discouraged consumers from paying more for superior products, regardless of price, even though Whole Foods has become increasingly interested in this area. As it pertains to the distribution of networks, Safeway has national contracts with vendors and Whole Foods has smaller contractual agreements based upon region.<br />The internal similarities between Safeway and Whole Foods are their dedication to sustainability, Corporate Social Responsibility, and innovation in offering new products and services. For example, both stores encourage customers to recycle by offering drop off locations for various items. When it comes to innovation in new services, both stores have co-branded with nationally known companies to generate more revenue by giving customers new reasons to visit their locations. For example, Safeway partners with Starbucks Coffee and Whole Food’s partners with Peet’s Coffee.<br />11.1: Safeway Burton Analysis<br />Goals – Quadrant D: Safeway’s goals are high on both effectiveness and efficiency. Industry wide, prices are declining primarily because of rigid competition in the current economy as well as deflation for some product groups. One of Safeway’s primary goals is cost cutting, which means increasing operational efficiencies. In his letter to stockholders in the 2009 Annual Report, Safeway’s CEO, Steven Burd, said: “We are managing costs while enhancing the customer experience. Through broad range of initiatives including increasing efficiencies across our supply chain, retail and backstage operations we exceeded our goals.” Historically, Safeway’s attention has always been on increasing efficiencies. Initiatives such as centralization of main functions like procurement, marketing, and pricing, extensive use of technology to manage the supply chain, the use of satellite television and radio broadcasting for employee training and internal company communication, were introduced to cut operational costs.<br />Safeway’s goals are high on effectiveness as well. Safeway has been continuously offering new products to address the needs of various customers. For example, there are the “O Organics” and “Eating Right” product lines to address the needs of health conscious customers and the “Bright Green” brand to address the needs of environmentally conscious customers. Safeway continues working on new offerings as well as introducing existing products into new markets. In the 2009 letter to stockholders Steven Burd says, “… We are continuing our track record of innovation in the supermarket business. We continue to develop a variety of innovative products and pursue vehicles for continued growth. Innovation is a growth driver for our business.”<br />On June 16, 2010, Safeway held its first annual innovation expo. Suppliers were invited to show the best consumer-focused innovation in this forum. “We are fired up about the Safeway Innovation Expo as it gives us the chance to highlight what we at Consumer Brands and our supplier partners are putting into our 2011 innovation pipeline for 2012 launch” – said Nancy Cola, Safeway’s vice president of Innovation for Consumer Brands. This shows the shift from concentrating on lowering the costs as much as possible to really looking at what consumers want and trying to satisfy those needs.<br />Strategy – Analyzer with Innovation: We think Safeway scores high on both exploration and exploitation. Steve Burd, CEO, defines Safeway’s strategy as follows: “Safeway’s operating strategy is to provide outstanding value to our customers by offering a unique shopping experience, including maintaining superior store standards and a wide selection of high quality products at attractive, everyday prices.” <br />In the retail food industry innovation comes from innovative services and processes, therefore, exploration are often directed toward improving the exploitation of efficiencies. An important component of Safeway’s strategy is providing everyday low prices. To be able to offer low prices and stay profitable, Safeway has to score high on exploitation in the area of efficiencies. One innovative way Safeway has introduced efficiencies into procurement is through the use of the Global Data Synchronization Network (GDSN). The GDSN allows suppliers to electronically pass item attribute information to Safeway, which it then reviews and sends a synchronized response back to the supplier. This allows both parties to synchronize item attributes without phone calls, emails, spreadsheets, etc. In addition, all suppliers are required to use Electronic Data Interchange (EDI), which enables exchange of business documents in an economical, accurate and expedited manner. <br />As our research showed, Safeway is highly centralized, and for a centralized organization, effective communication plays an important role. Safeway uses satellite television and radio broadcasting for employee communications and training. In order to create effective training, in-store promotions, and corporate messaging videos for both staff and customers, the company operates a sophisticated video production facility in Pleasanton. In our interview with the VP of Safeway Risk Management he stated that the communication systems are a highly efficient way to communicate corporate messages as well as to train employees.<br />Safeway also scores high on exploration. Exploration or innovation at Safeway comes in several different forms. First, Safeway continues working on offering new innovative products. Safeway views its portfolio of private label brands as its main means to compete with low price retailers such as Wal-Mart and Costco. "Rather than being a fast follower of national brands, we are mining consumer insights and proactively developing brands and products that meet consumers' emerging needs," says Susan Shields, group vice president of innovation. "It's about being proactive and developing a brand that has meaning." Interestingly enough according to market research by Organic Monitor, Safeway’s “O” Organics is becoming the leading brand of organic foods in the United States.<br />Second, Safeway continues to offer innovative services to its customers. One example is its online shopping and delivery services. Safeway started these services in 1993, but had to discontinue them because of high costs. It resurrected these services in 2002. Another example is a program called "My Household's Snapshot" that calculates the nutritional value of the customers’ shopping list. <br />Third, Safeway provides products and services outside the food retailer industry. One is Blackhawk prepaid gift cards business. Another is Safeway Health, a subsidiary that designs wellness plans for other companies using the Safeway wellness plan model. This subsidiary takes into consideration the lifestyles of the employees of outside companies to design the best wellness program. Steve Burd was named sixth on the Most Creative People in Business list by Fast Company Magazine due to his innovation in the healthcare sector.<br />Environment – Varied but moving towards Turbulent: We think the current environment is “Varied” moving towards “Turbulent”, which is high on both complexity and becoming high on unpredictability. Complexity depends on the number of players in the environment and the connections among the players. The more they are interconnected the more complex the environment is. There are a lot of players in the environment: customers, suppliers, government, competitors, unions, and the economy, to name a few. The level of interdependency among these factors is high; for example, behaviors of all these players majorly depend on the current economic climate. Competitors’ behavior depends on customers’ behavior, and on governmental regulations. Governmental regulations, in turn, depend on behaviors of everyone in the industry, as often regulations are a reaction to someone’s misdemeanor. We gave the environment the overall complexity score of 4 based on 7 major components with high interdependence. <br />The environment was relatively predictable until the economic recession changed everything and made the environment far less predictable. Customers have become more price sensitive, and Safeway has had to adjust its prices to meet consumer demand. Moreover, new trends in consumer needs and behaviors(such as an increased demand for environmentally friendly products and business practices, the increased demand for healthy products, and an increased preference for online shopping)force food retailers to constantly review their offerings. <br />In addition to traditional competitors, there are a growing number of non-traditional competitors such as supercenters, club stores, specialty supermarkets, drug stores, dollar stores, convenience stores, and restaurants. Coming out of the recession all the competitors are under a lot of pressure to improve profits and it is very difficult to predict what their next step will be.<br />Because Safeway deals with food, it is highly regulated by governmental agencies such as the FDA. It must comply with a lot of regulations, and new regulations or changes in the existing regulations may have significant impact on Safeway’s operations: “We cannot predict either the nature of future laws, regulations, interpretations, or applications or the effect these regulations would have on our future business. As a result of all these factors, we gave Safeway an average unpredictability score of 3.3. Please see exhibit5 for details.<br />Configuration – Hybrid: Using the information available in the 2009 annual report, we drafted an organizational chart for Safeway (see exhibit6). The structure appears to be a hybrid configuration. It is functional at the top with such centralized main functions as accounting, human resources, marketing, and procurement. It is divisional at the bottom with 11 geographical divisions. Safeway definitely scores high on functional specialization. Our research showed that in 2002 Safeway moved towards centralization of the main functions to allow more control over them and bring efficiencies to the organization.<br />As a food retailer, Safeway needs to be very close to its customers to be able to identify their needs and to properly address them. Having geographical divisions allows Safeway to address these needs. It also appears that within departments Safeway has subunits based on products. For example, the marketing department is divided into marketing of perishables and non-perishables. Such structure allows Safeway’s functional departments to be more responsive to the needs of its customers.<br />Safeway definitely has a complex structure, but we think the structure lacks strong connections among divisions and connections among divisions and functional departments to be a true matrix design. In our interview with Safeway’s risk manager, he mentioned that even though Safeway does a lot to be able to respond to the local needs better, the centralization makes it more difficult. It seems that communication from top to bottom is very efficient but communication from bottom to top is not, and for a centralized company that wants to be locally responsive it is critical to be able to collect information from the fields efficiently.<br />Complexity – Flat: Safeway definitely scores high on the horizontal differentiation; there are eleven geographical divisions and there are thirteen functional departments (please see the organizational chart in the exhibit 6). In terms of vertical differentiation, there are not that many layers between a store clerk and the CEO. There is a store department manager, a store manager, and a division manager. Such combination makes Safeway relatively flat. In our conversation with the risk manager he mentioned that divisions collect information from the stores and forward it on to the top management for the final analysis and decision-making. This arrangement works well with high Safeway centralization, and flat complexity.<br />People – Factory: In the people dimension, we think, Safeway is a “Factory”. The number of people is clearly high as currently Safeway has 186,000 employees, of which 80% are unionized.<br />In terms of professionalization, we think it is low based on looking at the store employees and not corporate employees. Safeway does not require any special education or training for the majority of its employees beyond learning how to “provide a high level of customer service and practice safe food handling procedures.” Most tasks in stores are highly repetitive and do not require a high level of professionalization. Out of 5 employees (a supervisor, a cashier, a stocking employee, a deli employee, and a bakery employee) that we interviewed at Safeway on Webster Street in San Francisco, all had high school diplomas, two attended college and one was a college graduate. <br />Coordination and Control – Machine: We think Safeway is a “Machine” when it comes to coordination and control as “Formalization” is high, and “Decentralization” is low. The retail food industry is highly regulated by the government. There are strict safety procedures for handling food, so it makes sense that the company is highly formalized. Moreover, Safeway has a single store format offering the same products, services, prices, etc. Since 2003 Safeway started converting all its stores into what they call “lifestyle stores”. In 2009 about 79 % of its stores were converted to this format, and in the next few years Safeway expects to complete the transition to 100% of its stores. Safeway will be the only major conventional food retailer with a common look and feel across its entire store base.<br /> Decentralization was relatively high before but in 2002 Safeway changed its structure and centralized major functions such as purchasing, merchandising, and marketing. Safeway believes this is a more efficient way to do business. One of the things Safeway is discovering through centralization, Burd said, "…is more visibility into what each division paid for the same product. We've found large differences in cost and significant differences in the quantity of goods sold without good reasons other than the fact each division operated with different price points, so we're learning how to price products for maximum sales."<br />From our conversations with Safeway employees at the San Francisco Webster location, as well as from the conversation with the VP of Risk Management at Safeway, we learned that major decisions are made at Safeway’s corporate offices. Divisional and store managers are mainly responsible for division/store operating decisions.<br />Task Design – Complicated: Safeway task design among store level employees is “Complicated”, which is high on “repetitiveness” and low on “divisibility”. A lot of tasks, such as restocking, handling products, safety procedures are highly standardized and repetitive, because, as we have mentioned before, the food industry is highly regulated. High standardization and repetitiveness ensure that all tasks are completed in accordance with the regulations.<br />The tasks score moderate on divisibility. There is little interdependence between the tasks within a store; each cashier can serve one customer and his/her tasks do not depend on other cashiers’ serving other customers. There is some dependence between such tasks as stocking and merchandising; inventory has to be ordered first, then delivered to the store, then displayed at the store by a merchandiser, and only then the product can be sold to a customer. Inventory tracking and delivery have to be timed correctly to ensure there are enough products to serve all the customers, but at the same time the stores are not overstocked.<br />Fits & Misfits: See exhibit7 for the Safeway Burton Model. Based on the Burton Model chart in the exhibit 7, most characteristics fall either in quadrant B or D, with complexity being in quadrant C. This shows that Safeway’s goals of effectiveness and efficiency are well aligned with its strategy of exploitation and exploration. Both goals and strategy also work very well in the current turbulent environment. <br />The hybrid configuration scores high on both functional specialization and product/customer orientation and falls in quadrant D. Nonetheless, it lacks well established connections between functional departments and divisions as well as interdivisional connections. This can hinder the level of responsiveness of each division/store to the local needs. Complexity is relatively flat, which goes hand in hand with high centralization. This means that all major decisions are made at the top level. This can bring efficiencies in some areas (purchasing, for example), but it can also create inefficiencies in other areas such as ability to quickly respond to the changes in the local needs. <br />The task characteristic fell in quadrant B; it is high on repetitiveness, but relatively low on divisibility. Even though it is in a different quadrant from most of the other characteristics, we think it fits Safeway well. The level of standardization is high, mostly due to the highly regulated industry. High standardization goes well with repetitive tasks and makes them easier to coordinate in such a big organization as Safeway. Similarly, we think that the factory approach to managing people also works for Safeway. It fits well with the complicated task design. Knotty task design and the office approach to store employees would make Safeway very inefficient. <br />Coordination and Control is machine. On the one hand, it fits well with the task design and Safeway’s approach to people in the company, but, on the other hand, it does not fit with the dual goals of efficiency and effectiveness, as well as the strategy. There is definitely a need for formalization of certain areas like Safeway’s operations, because of the industry regulations, but high levels of centralization affect Safeway’s agility. <br />Section 11 -2: Next we present the Burton Model Analysis for Whole Foods.<br />Goals: High on effectiveness, lower on efficiency (Quadrant C) - but moving towards a mixture of effectiveness and efficiency (Quadrant D).Whole Foods, the largest natural food grocery store chain in the U.S., has historically been more effective than efficient in its goals by focusing on an affluent customer. Its motto, “Whole Foods, Whole People, Whole Planet”, focuses on the customer and environment. Whole Foods “core values” also focus on its customers, its healthy mission, and its team oriented attitudes toward its stakeholders. (See Exhibit 8). Whole Foods has differentiated itself by offering high quality and high priced products to attract a high paying customer. <br />Historically, Whole Foods offers more of a premium shopping experience than a traditional grocery store. However, the 2008recession forced Whole Foods to more aggressively compete against traditional grocery stores like Safeway and Trader Joes to attract more price sensitive customers. One way Whole Foods did this was by changing the store experience to appear less fancy and more down to earth, so it can be perceived as efficient as well as effective and attract more customers. “We're in the process of de-glitzing our stores. We think that's part of what contributes to the "Whole Paycheck" image. We want it to look more natural, more wood and more earth tones.” <br />Whole Foods is also now growing more slowly. In the 2009 annual report the CEO said, “We're opening smaller stores. Average size has dropped 20% in the past year, from a high 50,000-square-feet average to a low 40,000 square feet. Everything has shrunk a little bit.” By redesigning its stores, and by looking to grow through creating smaller stores, it is addressing the new landscape of the price conscious consumer and acting more efficiently in the use of its resources.<br />Whole Foods is not known for having the lowest prices and has been nicknamed “Whole Paycheck”. According to a recent article, “Whole Foods Market… has unveiled plans to get healthier and less expensive under pressure from the recession and competition that is emphasizing the value component of better eating.”Being competitive on price has become a priority for Whole Foods. However, when the CEO was asked about Whole Foods being known as “Whole Paycheck”, after describing how competitively priced many products are, he added, “But you can't always be cheapest if you have the highest quality.”Whole Foods has changed its views on the importance of low price. However, being the cheapest is not Whole Foods’ sole focus either showing that effectiveness is still an acceptable goal for Whole Foods even if it must also actively embrace efficiency.<br />Because buyers can purchase from both local and regional and national distributors, Whole Foods cannot always receive the lowest prices, but can offer a wider array of products than other grocery store chains. Whole Foods can offer locally sourced specialty products not offered by its competitors. Access to special products is more important than access to the lowest cost products. Again, the distribution model shows an emphasis on effectiveness, by allowing buyers access to high priced and specialty items at a local level, but they do have a national and regional system in place that helps them with efficiency, something necessary for a grocery store chain to remain competitive.<br />Strategy: Prospector moving towards Analyzer with Innovation. Whole Foods has been a Prospector, or creator of change, in the grocery store industry, focusing on exploration over efficiency. Whole Foods grew based on its unique offerings of healthy and quality foods, being a leader in sustainable business practices, and by targeting an affluent audience. However, the change in the economy caused it to move towards an analyzer with innovation strategy where it more actively defends its position against the competition while remaining innovative. The text describes this strategy as “…a market-driven approach to innovation as they look at the market or customer needs and then to try to innovate to meet those needs.” <br />One example of this Prospector strategy is Whole Foods approach to customized store design. “[E]ach store’s design is customized to fit the size and configuration of the particular location and community in which it is located.” In 2010, Whole Foods opened a new store in Southern California in which it carries products that appeal to the local Vietnamese community and created a pizza and beer bar to appeal to the local beach crowd.Whole Foods strategy of being customized to each neighborhood and community is a way to continually maintain its competitive advantage against other supermarkets, and something that involves openness to change over economies of scale. However, as mentioned above, Whole Foods is also re-evaluating its store design, and making stores less glitzy, in light of economic difficulties, which shows it is moving towards the Analyzer with Innovation strategy.<br />Whole Foods targets an affluent and health conscious customer, which has been a more innovative and risky approach, or prospector strategy, for a grocery chain. However, the fact that Whole Foods has not been concerned with low price, and now wants to change its image to be perceived as a low price leader shows it is trying to move towards an Analyzer with Innovation strategy to capture more of the market occupied by its competitors.<br />Although Whole Foods promotes private label brands, it does so slightly differently, evidence of an attempt to move to an analyzer with innovation strategy. Although Safeway already has an organic private label line, Whole Foods, being known for Organics throughout its store, takes private label brands a step further. The CEO explains:<br />“We'll introduce a private-label line in 2011 based on the healthy eating book The Engine 2 Diet… It's vegan (no animal fats) with no canola or safflower oils, and low in sugar and salt.”<br />Environment: Varied moving towards Turbulent. The environment prior to the economic downtown was relatively predictable, but high on complexity and fell into the variable category. The factors that affect Whole Foods affect all other grocery store chains. Food recalls are a threat to profitability and image. Food prices are affected by environmental factors. Labor costs, influenced by healthcare costs and the threat of unions, as well as energy costs, affect all grocery store chains. The factors that affect the Whole Foods environment became high on unpredictability as a result of the economic downturn and the environment has become more turbulent than varied for Whole Foods. The economy negatively affected people’s willingness to pay premium prices for food in an unpredictable way which caused Whole Foods to focus on low price and scale back its growth strategy for the first time. <br />Configuration: Hybrid of Functional and Divisional, but not truly matrix; Coordination & Control: Clan. The Whole Foods organization is a hybrid configuration, where each store makes some decisions independently (divisional), but also has centralized corporate resources from which it can draw (functional). Executive management supports overall corporate functions, but encourages store level autonomy so each store can best serve its local market and community. This configuration does not seem to be coordinated in an overall way, which makes it a hybrid rather than a matrix configuration. For example, there are central marketing activities, such as a corporate website and a national magazine, but stores also retain their own marketing budget. ” Our stores spend most of their marketing budgets on in-store marketing-related activities, including…events such as local farmers’ markets, taste fairs, classes, tours and product samplings.”A description of the decision making process highlights the clan model of coordination and control present at Whole Foods:<br />For the past 10 years, a tight knit team of five senior executives have functioned as a sort of CEO committee, collectively making decisions on strategy, finances and other company matters… Mackey [CEO of Whole Foods] insists he's not the final authority in the group…."[W]e do really have a team approach to the organization…"Mackey and the others who run Whole Foods say their style of leadership is a natural outgrowth of the company culture, which emphasizes shared decision-making and the power of the group mind.<br />This is reinforced by how individual stores are organized. Store teams are empowered and encouraged to make decisions at the store level. <br />We…promote a decentralized team approach to store operations in which many decisions are made by teams at the individual store level. In this structure, an effective store team leader is critical to the success of the store.<br />At Whole Foods, a strong culture, promoted by strong leadership, demonstrates Whole Foods highly formalized approach. But the way in which these values and cultures are manifested is at the store level, in a highly decentralized manner.<br />Fits and Misfits: Whole Foods strong culture and clan approach to coordination and control make it a flexible organization. It has reacted well to a changing environment by taking steps to evolve. Its goals have changed from focusing on effectiveness to focusing on both efficiency and effectiveness. It has changed its strategy from prospector to analyzer with innovation. However, its hybrid structure may be the one aspect that holds it back from reacting more quickly and effectively to its changing industry. If Whole Foods adopted a matrix strategy, where the corporate functional groups are more closely linked to the divisions or stores, innovative ideas related to marketing, product sales, and leadership might be more easily shared throughout the organization and ways to find savings or act more efficiently might be more easily shared. Because the company already has a strong culture, a matrix configuration could help the company communicate more effectively while allowing it to maintain its innovative ways.(See Exhibit 9 for the Whole Foods Burton Model.)<br />II – 3: Comparison of Safeway and Whole Foods Burton Model Analysis<br />Safeway and Whole Foods are similar in many respects. Being in the same industry, they share the same environment. Safeway has been stronger on efficiency, being a leader in low prices and cost cutting, and focusing more on internal factors. Whole Foods, on the other hand, has been more focused on effectiveness and outputs such as providing high quality customer service, and for being a leader in sustainable business practices. With the economic downturn, both companies have had to focus on both effective and efficiency goals to remain competitive. Safeway has developed healthy private label brands and innovations that improve customer service. Whole Foods, on the other hand, has put efforts into being a low price leader and scaling back on the premium shopping experience. As a result, both are moving towards a strategy of Analyzer with Innovation by imitating successful aspects of one another.<br />Both organizations also have hybrid, and not matrix, configurations. Both are functional at the top, with centralized main functions such as human resources and accounting, and divisional at the bottom, with Safeway dividing its stores geographically and Whole Foods’ keeping its store autonomous and independent. Both stores could benefit from a matrix configuration with a level of management that coordinates the two levels, so that new ideas can be effectively shared and adopted throughout the organization. This would ensure the top functions could understand what each store needs in order to best serve its customers, and it could facilitate the best way for the corporation to accomplish these objectives overall.<br />It is not clear that one store is a leader over another. Safeway is much bigger than Whole Foods, with more than 3 times the number of employees and more than 6 times as many stores as Whole Foods. Whole Foods is only 32 years old, whereas Safeway has been around for 95 years. Over the last five years, Whole Foods has achieved higher stock prices than Safeway. Although both companies’ stock prices plummeted in January 2009, Whole Foods’ stock has performed consistently better in 2010 and is trading at significantly higher prices than Safeway. <br />Is Whole Foods a passing fancy or a corporation to be reckoned with? Whole Foods has certainly been able to capture a different market, the affluent and health conscious consumer, to which Safeway is catching up. But the recession of 2009 left fewer affluent customers than before. Whole Foods also spent a great deal of money to present a new shopping experience, one that Safeway is also starting to catch up to and one that Whole Foods is revising and scaling back to fit current economic conditions. Whole Foods has been able to grow relatively quickly in the last 30 years, and has been able to normalize a grocery store experience that only previously existed in specialty stores. Whole Foods’ CEO has driven its vision and innovations. Once that leader steps down, will Whole Foods be able to continue on this path? Or has Whole Foods woken up its competitors, like Safeway, to a new way of doing business that it can imitate more efficiently? This remains to be seen.<br />III– Change Recommendations for Safeway.<br />Based on both SWOT/TOWS and Burton Analysis we would like to recommend the following two top priority changes.<br />Configuration & Complexity: Safeway is currently a hybrid organization because it is functional at the top and divisional at the bottom. We think it should become matrix in organizational configuration. Safeway should move towards becoming more symmetric in complexity as opposed to its current relatively flat level of complexity.<br />Coordination & Control: Safeway is machine, because it is highly centralized, and because decisions are made from the top down. It should move to Clan, as per our analysis of Whole Foods, so that the company can be more flexible.<br />To correct the misfit within the step, we recommend Safeway move from a flat organizational complexity to a symmetric organizational complexity. The flat level of complexity conflicts with the hybrid structure. Safeway should also move from a hybrid configuration to a matrix structure so ideas and business processes can effectively filter through the organization. Safeway would need a new level of management to coordinate this structure, and tie the levels and entities together. But the matrix structure would facilitate Safeway’s ability to reach its goals of efficiency and effectiveness more easily. Our interviews and research demonstrated that although communication is open in Safeway, decisions filter from the top down. Our contact at Safeway stated that because decisions are made in this way, it is harder for Safeway to tailor stores towards specific local tastes. If there was a level of management that could tie the local stores to the central decision making processes, ideas for improvement and innovation might more easily filter through the company. As well, we found that employees at Safeway feel it is extremely unlikely that anyone can get promoted to corporate management. They can get promoted within the store level, but not move higher than that. Safeway is possibly missing out on important talent and ideas with their current organizational configuration and level of complexity.<br />To correct the misfit between the steps, we recommend Safeway consider moving from Machine to Clan level of coordination and control which will align Safeway with its goals, strategy and configuration. Safeway is a Machine because it is highly centralized and because decisions are made from the top down. Although some level of machine coordination and control makes sense as for a large grocery store chain to operate efficiently, this high level of centralized decision making makes it difficult for stores to reflect local preferences and to make decisions at a local level. Whole Foods, on the other hand, has made responding to local tastes a high priority, even to the level of a customized store design strategy, but it has had to cut back on this in order to remain efficient and competitive. Possibly a middle ground, more in line with a Clan way of thinking but still formalized and centralized for efficiency can be reached so Safeway can respond more effectively to local needs without losing economies of scale or the value of centralized resources.<br />As per the Force Field Analysis (exhibit 10) the factors that can assist or drive these change (with their weightings) are empowering employees by increasing the organizational flexibility (40%), increasing responsiveness to local tastes and the local community (local market) (10%), addressing the turbulent environment threat (25%), and addressing competitive pressures (25%). Also, as per the Force Field Analysis, the factors that could hinder or restrain these change (with their weightings) are implementation costs (45%), lack of stakeholder buy in (25%), and employees ability to adjust to a new culture within Safeway (Cultural Adjustments) (40%). <br />Implementing these two changes will help address some internal weaknesses identified by the SOWS/TOWS analysis. Improved internal communication and coordination will assist with consistency of service and ensure all employees are aligned toward Safeway’s organizational goals. Safeway must decide if the cost of adjusting the misfit is worth the expense. The turbulent environment may have a more significant effect on Safeway’s performance. Therefore, if Safeway does decide to move forward with the changes, a holistic change approach to successfully address the misfits is recommended. <br />Exhibit 1: Safeway SWOT/TOWS Matrix <br />
    • External Opportunities (O):New consumer needsGrowth of consumer sustainability awarenessE-retail growthTarget new marketsExternal Threats (T):CompetitionBargaining power of consumersEconomic conditionsChanges in government regulationsNarrow marginsTechnology DisruptionsInternal Strengths (S):Leverage with suppliersOne stop shopping/convenientHigh quality & specialty productsSustainable practicesMultiple locationsExpertise/ Innovation“Maxi-Maxi Strategy”:4S/2O“Maxi-Mini Strategy”:6S/1TInternal Weaknesses (W):Substantial indebtednessRelative inflexibilityConsistency of service Unionized employeesProduct Recalls“Mini-Maxi Strategy”:1W/1O“Mini-Mini Strategy”:2W/3T
    Exhibit 2: Safeway SWOT/TOWS additional analysis:<br />Internal Strengths<br />Expertise. Safeway has been in business since 1915 and has developed knowledge and expertise of the retail industry.<br />Internal Weaknesses<br />Product recalls. Food and drug products are highly regulated and highly susceptible to product recalls, and such product recalls can be very costly, as they involve direct expenses of pulling the products from the stores, multiple liability claims, and damaged reputation.<br />External Opportunities<br />Target new markets. Find new avenues to move forth the lifestyle brand into new markets.  "We also opened a second small store in downtown San Jose, California designed to appeal to busy working professionals and nearby residents. We continue to evaluate other urban locations."  <br />External Threats<br />Bargaining power of suppliers. Suppliers may increase prices or for various reasons refuse to work with Safeway.<br />Information technology disruptions. Safeway has large, complex information technology systems that are important to its business operations. Safeway could encounter difficulties developing new systems or maintaining and upgrading existing systems. Such difficulties could lead to significant expenses or losses due to disruption in business operations.<br />Exhibit 3: Whole Foods SWOT/TOWS Matrix <br />External Opportunities (O):ExpansionGrowth of new products categoriesLeading in legislation changesLow real estate prices External Threats (T):CompetitionEconomic DownturnUnionization of WorkersInternal Strengths (S):Premium Shopping ExperienceOffers healthy food options Expanding Market ShareGood treatment of employees“Maxi-Maxi Strategy”:S1/O1“Maxi-Mini Strategy”:S1/T1Internal Weaknesses (W):High PricingDeclining MarginsDecentralized purchasing“Mini-Maxi Strategy”:W3/O1“Mini-Mini Strategy”:W1/T1<br />Exhibit 4: Whole Foods TOWS additional analysis<br />Maxi-Maxi: Using its unique experience strength to take advantage of the expansion opportunity. Expanding market share with continued opportunities to grow will allow for a much larger organization.<br />Maxi-Mini: Using its unique shopping experience strength as a competitive advantage. Because Whole Foods is known for its more upscale experience, it can win in this category as many other competitors are not known for this experience. Its strength differentiates them from the competition, and it can find ways to expand this through new locations, international markets, or smaller urban locations.<br />Mini-Mini: Reducing the high prices weakness and avoiding the competition threat. Because the competition is known for lower prices, Whole Foods may need to have a set of products or incentives that match these lower costs, to bring in the more price sensitive customers. Once they are in, the other benefits<br />Exhibit 5: Environment Unpredictability Score<br />Factors In the EnvironmentUnpredictabilityCustomers3Competitors4Government Regulations4Unions2Suppliers2Economic Situation5<br />Exhibit6: Safeway Configuration<br />Exhibit 7: Safeway Burton Model<br />Exhibit 8: Whole Foods Core Values:<br />Selling the Highest Quality Natural and Organic Products Available<br />Satisfying and Delighting Our Customers<br />Supporting Team Member Happiness and Excellence<br />Creating Wealth Through Profits & Growth<br />Caring about our Communities & Our Environment<br />Creating ongoing win-win partnerships with our suppliers<br />Promoting the health of our stakeholders through healthy eating education.<br />
    • KeyGoalsStrategyEnvironmentConfigurationCoordination & ControlExhibit 9: Whole Foods Burton Model
    • 4. Exhibit 10: Force Field Analysis
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