Module 3: Inputs Diagnosis of Whole Foods

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To analyze how well a business’s strategy aligns with its inputs, begin by analyzing the company’s business strategy. The strategy can be classified according to Porter’s Three Generic Competitive Strategies: Cost Leadership, Differentiation, and/or Focus. Then, utilizing the Nadler-Tushman Congruence Model, critical inputs should be identified in the company’s Environment, Resources, and History. Then the inputs should be analyzed to see if they are congruent with the business strategy.

Whole Foods Strategy

Whole Foods’ Strategy includes its goals, objectives, and strategic initiatives. According to its 2013 Annual Stakeholders’ Report, Whole Foods Market’s official mission “is to promote the vitality and well-being of all individuals by providing the highest quality, most wholesome foods available” (Whole Foods Market 2013 Stakeholders Report, 2013, p. 1). It lists organically grown foods, sustainable development, and healthy eating as key facets of the mission. Additionally, the company includes a bulleted list of Core Values, including positive affirmations about the health, happiness, and well-being of customers, suppliers, and investors. Interestingly, it mentions the interdependence of stakeholders, which seems to include everyone with a stake in the ecosystem as a whole, in addition to employees (“team members”), customers, suppliers, and investors. The vocabulary, itself—consisting of words such as interdependence—already indicates progressive business strategies.

Part of Whole Foods Market’s success comes from its early start in the market it helped create and foster. Thirty-five years ago, other mom and pop organic, local stores existed, but Whole Foods was the first to expand into the national market. From the start, it focused on high quality, natural, organic foods. It created a recognizable brand differentiating itself and focusing on a niche market of like-minded somewhat affluent, socially conscious customers focused on health and the environment.

Porter’s Three Generic Competitive Strategies

Continuing with the analysis, the strategy can be classified as one (or more) of Porter’s Three Generic Competitive Strategies to create a defendable position in the industry in the long term and to outperform competitors (Porter, 1980). These three strategies include Cost Leadership, Differentiation, and Focus.

Cost Leadership

Cost Leadership Strategy aims for the lowest market prices. It can attempt this through streamlining processes, as Henry Ford did with his innovative, efficient production lines for the Model T (Porter, 1980). This strategy generally requires a high relative market share or superior access to raw materials. It attempts to create a competitive advantage enabling it to lower costs and maintain or lower prices. Management tends to pay close attention to cost control and might micromanage in an effort to keep processes lean (Porter, 1980). This strategy is not the closest fit to Whole Foods’ strategy. It is true, though, that beginning with the downturn in the economy, Whole Foods began to develop and distribute more of its own private label products (Bailleuil, 2013). This cut out the middleman and allowed for some price drops. Interestingly, despite the improvement in the economy since then, buyers are continuing to buy those products at a high rate, when compared with third-party brands.

Whole Foods also spent very little—only 0.4% of sales—on marketing in 2013. Compare this to Safeway, which spent 1.1% of a much larger sales intake on marketing. Whole Foods relies, instead, on word-of-mouth to bring in new customers (Bailleuil, 2013). It spends marketing dollars on introducing customers to new products and on local community projects. This is a cost-saving maneuver, but it is also another way in which it differentiates itself from its competitors. Its grassroots marketing is on-brand.

Differentiation

Differentiating its products or services is Whole Foods’ main strategy. Porter (1980) points out that differentiation does not allow a company to ignore costs, but it does mean price isn’t its primary focus. Whole Foods emphasizes quality and utilizes several different inspection and certification systems to guarantee that quality to customers. In general, customers expect to pay an incrementally higher amount for higher quality products. Whole Foods also puts a premium on paying its employees well and fostering a culture of inclusivity and interdependence—not just between employees, but among all potential stakeholders (Whole Foods Market’s 2013 Annual Stakeholder Report). The typical Whole Foods customer considers shopping at an environmentally and socially conscious store to be a lifestyle choice. Whole Foods is aware it will not attract those customers who only want the cheapest products. But—as part of its mission and core values—it considers its role in the market to be about providing natural, organic, healthy alternatives to traditional grocery store products. This branding has been consistent throughout its 35 years of business. Additionally, this market position allows for higher margins, giving the company more flexibility with suppliers.

It must be pointed out, however, that one of the appeals of Whole Foods is its local, friendly feel. It might be difficult to maintain this personal feel as the chain increases in size. Within the differentiation strategy, barriers to entry for competitors include customer loyalty and the necessity of overcoming uniqueness. One characteristic that could be a boon or could be a drawback is the idea of exclusivity, which can be incompatible with the idea of a large/high market share. This is partly because of the inevitable trade-off between high quality/exclusivity and price, though the cheaper private label brands have helped ease some of the price pressure. Another risk is that it’s possible to lose its differentiation through time if competitors begin to carry similar products.

Narrow Focus

Another strategy, which Whole Foods incorporates to a lesser extent, is maintaining a narrow focus. Whole Foods focuses on very specific types of products—natural, organic foods and other products—and a very particular customer base—progressive, socially conscious consumers. And it doesn’t deviate from this focus. Additionally, while some of the products are sourced nationally to take advantage of economies of scale, a certain amount of bargaining authority is given to stores so they can negotiate with local suppliers. This is another factor allowing each location to maintain a more personal feel.

Critical Inputs

“Inputs” are factors that—at any point in time—are the “givens” of an organization: the material it has to work with (Nadler & Tushman, 1998, p. 38). Analyzing the different categories of inputs for congruence with a company’s business strategy can reveal disconnects between the analysis and the execution.

Environment

Environmental factors are those external to the organization. For Whole Foods, critical environmental factors include the recession and an increasing number of competitors. In response to the recession, the organization increased the number of private label products offered. New competitors include unconventional ones, such as Costco, Wal-Mart, and Target, in addition to grocery stores such as Safeway (O’Connor, 2014). Some of these competitors have more market share and greater resources than Whole Foods. In fact, Whole Foods just reduced expected earnings projections for 2014 because of competitive pricing pressures (Wahba & Baertlein, 2014). One thing to keep in mind, however, is that the organic market as a whole continues to expand; over the past 10 years, it has more than tripled and doesn’t show signs of slowing (Bailleuil, 2013). Competitors will continue to angle for bigger slices of the pie, but the pie, itself, will likely continue expanding.

Resources

Resources are factors internal to the organization. One of the most important critical resource inputs for Whole Foods is its employees. Satisfied, loyal employees take the time to explain products and health concepts to interested customers as part of the interdependent Whole Foods community. Fortune Magazine has included Whole Foods on its List of the 100 Best Companies to Work For (Whole Foods 2013 Stakeholders’ Report) every year it has been published. So long as the company continues to put a premium on employee happiness, that critical part of the puzzle should hold. Many of the other internal resources also seem encouraging: the company does not have long-term debt obligations, for example (Whole Foods’ Annual Stakeholders’ Report 2013).

History

Other inputs include history and tradition—in the form of consistent and clear business strategy and branding—which can create a reassuring presence for loyal customers and a relatively secure market presence. On the other hand, it can potentially lead to stagnation, inflexibility, and repetition of past mistakes. An encouraging sign, however, is the plan to create smaller stores in secondary markets, which have been performing quite well. This allows penetration into new markets without as much capital expenditure. Clearly, Whole Foods is learning how to become nimble and adaptable to market and customer demands.

Inputs from one category can greatly affect inputs from the other categories—they are all more or less interdependent. As an example: well-trained, competent employees (resources) might negotiate with suppliers (environmental factors) to react appropriately to shifts in a difficult economy (environmental factor). Or the positive traditions and history of the business (history) can enhance the positive culture and its effect on employees (resources), but if followed blindly can lead to unrestrained attempts to expand at an unsustainable rate (history).

Congruence

The inputs of Whole Foods Market, consisting of organizational environmental factors, internal resource factors, and historical tradition factors are highly congruent with the company’s strategy of differentiation. While its reputation and differentiation allow it some extra margin, the company has also taken note of changing environmental conditions and doesn’t rely on differentiation alone. The organic food market is continuing to expand at unprecedented rates and new competitors with lower prices have affected Whole Foods’ bottom line. Shifting strategies completely would be a mistake, but Whole Foods has increased its inventory of low-cost private label products and has adjusted expansion plans to a more restrained size and pace. It retains its brand and reputation, while also making small adjustments brought on by market requirements. Bailleuil highlights these inputs along with its small marketing costs, strong supplier relationships, and the potential size of the ever-increasing organic food market and recommends investing (2013).

Conclusion

So long as Whole Foods continues its differentiation strategy, along with small adjustments allowing for some competitive pricing and controlled growth, it will continue to thrive. Its environmental, resource, and history inputs are more or less congruent with the strategy of differentiation, so long as the company also remains flexible to potential changes in the market. The company has a very well-defined brand presence with a high level of customer and employee loyalty that should lead to continued growth.

References

Bailleuil, R. (2013, June 5). 5 reasons to buy this retailer. The Motley Fool. Retrieved from http://beta.fool.com/robertbaillieul/2013/06/05/3-reasons-to-buy-this-retailer/36061/

Fortune Magazine. FORTUNE Magazine’s 100 best companies to work for 2014. Retrieved from http://money.cnn.com/magazines/fortune/best-companies/

Nadler, D. A. & Tushman, M. L. (1980). A model for diagnosing organizational behavior. Organizational Dynamics, 9(2), 35-51.

O’Connor, C. (2014, February 28). Are grocery stores doomed? Study shows more shoppers buying food at Target, Wal-Mart, pharmacies. Forbes. Retrieved from http://www.forbes.com/sites/clareoconnor/2014/02/18/are-grocery-stores-doomed-study-shows-more-shoppers-buying-food-at-target-walmart-pharmacies/

Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: The Free Press.

Wahba, P., & Baertlein, L. (2014, February 12). Whole Foods cuts 2014 sales, profit forecast; shares slip. Reuters. Retrieved from http://www.reuters.com/article/2014/02/12/us-wholefoods-results-idUSBREA1B25V20140212

Whole Foods Market. (2013). Annual Stakeholders’ Report 2013. Retrieved from http://www.wholefoodsmarket.com/sites/default/files/media/Global/Company%20Info/PDFs/WFM-2013-Annual-Stakeholders-Report.pdf

Whole Foods Market. (2012). Green Mission Report 2012. Retrieved from https://www.wholefoodsmarket.com/sites/default/files/media/Global/PDFs/2012GreenMissionReport.pdf