Discussion on Loblaw and Wal-Mart - Essay Example

DISCUSSION ON LOBLAW AND WAL-MART, OUTLINING THE IMPORTANCE OF ENTRY & EXIT BARRIERS AND STRATEGIES THAT FIRMS CAN USE TO DETER ENTRY AND THE ECONOMICS OF PRODUCT DIFFERENTIATION. Introduction Wal-Mart and Loblaw also known as president’s choice are two competing superstores in the Canadian market. Although there are other big company in Canada like Fortnum and mason Wal-Mart and Loblaw are the most popular. The Wal-Mart company was established in 2006. It was claimed to have very fresh food in their stores. It also had a variety of perishable foods in their stores. To fit in market competition the Wal-Mart decided to reduce the cost of their product. This turned to great threat to the Loblaw Company (Financial post 2006). In 2006, the Loblaw Company lost completely its market to Wal-Mart stores. During this year the Loblaw reported a loss of 219 Canadian dollars due to increased competition (Ian 2007, P. 1). To counter the competition raised by Wal- Mart the company introduced new products in the market. After that Loblaw utilized the strategy of constructing large superstores in its effort to pre-empt Wal-Mart in the market. For instance, Loblaw Company limited has more than one thousand and fifty stores located in various locations in Canada such as Fortino, Loblaw and Zehrs (Marina 2010). In 2002, it constructed a large superstore with the label Real Canadian Superstore (RCSS) acting as the company’s competitive strategy. In addition to that, in 2004 the company constructed 13 stores and similarly in 2005 it was supposed to construct seven more stores. On the contrary, since 2002, Wal-Mart Company limited has not constructed any megastores apart from its “5 Sum Stores” situated in Ontario (David, David, Mark S., and Scort., 2006, p. 226). However, through utilization of adequate competitive strategies, Wal-Mart can effectively compete with Loblaw and deter entry and exits into their market arenas. The importance of entry and exit barriers and strategies that firms can use to deter entry Entry and exit barriers are significant for firms that are competing. In that case, firms such as Loblaw and Wal-Mart should develop strategies that will help them in entry deterring. Entry barriers are extremely essential because they are crucial in many cases of competition. It is thus important for company’s president’s to consider barriers to entry while assessing dominance and in their determination whether unilateral conduct might discourage new entrants from taking part in the market. Most importantly, barriers to entry might dampen, retard or nullify the usual market mechanism utilized in checking market power in terms of arrival and attraction of new rivalry. Additionally, substantial barriers to entry are essential in proving that the existence of a high level of market share translates into a superior market in abuse or monopolization of dominance cases (Turut and Ofek, 2000, p. 576). Over decades, various arguments have existed among economists on how to define entry barriers. Generally, the term refers to an obstruction that makes it extremely difficult for firms to get into a market. A hot debate has persisted on which hindrances should qualify to be termed as barriers to entry. However, the following have been termed as barriers to entry strategies such as scope and economies of scale, differentiation of products, cost consideration in terms of unique location and raw materials and access to channels of distribution and government regulation These strategies determine the firm’s competitive strategies as defined in porter’s model (Porter 1985, p.11). The strategies focus on two principal factors that revolve around differentiation and cost focus. In cost leadership, an industry strives to be the leading producer in the industry with low cost. The cost advantage sources are dynamic depending on the industry structure. The sources are such economies of scale pursuit, raw material preferential access and other significant factors and the use of proprietary technologies. If Wal-Mart and Loblaw wants to be the low cost producers in the market, they must exploit and find all cost of advantage sources. Loblaw has been able to achieve competitive advantage over Wal-Mart by locating its stores in highly populated areas thus locking out Wal-Mart from accessing the area. This was after the attempt to reduce the cost of their product to counter the Wal-Mart in the market failed (Ian 2007, P. 1). Another perfect example of entry barrier to the market is through industry differentiation. Through differentiation, a firm tends to be unique from its competitors through utilization of multiple dimensions that are valued widely by its buyers. In that case, an industry selects various attributes that numerous industries buyers conceive to be of significant and position itself uniquely to meet the needs of its customers. As a result, the industries become awarded with a premium price for its uniqueness. The Loblaw Company employed this strategy in the Canadian market to counter their competitors. The last generic strategy is the use of focus. This strategy lies on a scope that is narrowly competitive within the context of the industry. In this strategy, an industry focuses on a certain group or segment in the industry and focuses to serve them perfectly to the exclusion of other segments. Focus as a strategy utilizes differentiation focus and cost focus. A firm uses cost focus to target a segment for purposes of seeking a cost advantage. In this case, the Loblaw Company decided to invest more on Toronto than other areas of the country. On the other hand, a firm uses differentiation focus for purposes of seeking differentiation in its segment target (Aghion et al. 2005, p.705). Government regulations act as an effective strategy in limiting entrance into the markets. Government regulations helps in making services offered by various companies not to be exposed to high external competition degrees The government utilizes privatisation and deregulation to shape competition for structural reforms and services(Kato & Polat, 1995, p.40). Even though companies’ services or goods are exposed to competition internationally, domestic producers are often given strategic advantages in comparison to foreign competitors. The advantages are in terms of market closeness and market position dominance. Furthermore, given the fact that goods and services are manufactured and consumed on the similar place, competition internationally for services depends greatly on outlet establishment in various markets. In the case of Loblaw and Wal-mart, after being defeated in the internal market, the Loblaw Company decided to move their business outside Canada. The Loblaw idea of changing it stock was however blamed by the government for its attempt to change the country brand. This was because it was rated as on of the most productive private company in the country (Marina 2010). This was to increase their sales hence increasing their profit (Ian 2007, P. 1). This mechanism creates entry barriers making it extremely difficult for direct investment for foreigners. Economy of product differentiation As observed by Browning and Mark (2003, p. 89), product differentiation is the initiative of discerning a product from other products in the market with the aim of increasing its attractiveness to the potential customers. The core intends is to differentiate a product from other competitive products in the market. Product differentiation increases value to the product as well as exhibiting the distinctive facets of a product in comparison with other competitive products. Product differentiation provides variety of the products in the market for customers in any specific production. In general, company and firms do not differentiate product to increase variety in the market, but to make the products more attractive to the customer. This is one of the main engines which lead to the development of the economy (Kirzner, 2006, p. 200). Product differentiation generates improved products to the potential customers, reduces the products cost, and also creates improved products in the market. In some cases, companies differentiate their product because they are unable to replicate directly the products of the competitors. According to the neoclassical theory, product differentiation is very helpful to the customer as it provides variety of the product in the market. In the monopolistically competitive companies, the benefits of product differentiation are counterbalanced by high production cost. In the neoclassical framework, the benefit of product differentiation is only to increase variety of products in the market. The main idea behind product differentiation is to represent distinctive product to the customer. The product differentiation can either be complicated or simple. They range from mere change in the package and advertising messages to extensive change of the product component (Frank, 2003, p. 67). Some of the most apparent product differentiation is model includes; differentiating the physical feature of a product, differentiating the quality of the product, differentiating the sales promotion techniques, differentiating the availability and accessibility Pattern, and differentiating the quantity of the product to the customer. In its effort to attract more customers in the market and to make more profit, the Loblaw companies limited decided to differentiate its product in the market. They introduced new non food product in their branches avoid the repetition of the loss they encountered in 2006. In the new superstore, the company decided to include other products such as pharmacy drugs stores, optical department, drycleaner store, grocery, and home electronic department. This inventiveness differentiated its product from Wal-Mart Canada it central competitor. The Loblaw also made it plan to build “The Real Canada Superstore” public for all its customers to be acquainted with its emergence. All this was with an aim of countering their competitor initiative of building a megastore. In this regard, the Loblaw effort of moving fast in its initiative enhanced its access to the vastly populated cities in the country like Toronto. The company idea of making public its project of building the RCSS together with numerous assortment of non groceries and grocery products and application of the most appealing promotion mechanisms made the RCSS the central destiny to a substantial number of buyers in Canada(David, David, Mark S., and Scort., 2006, p. 226). At its initial stage, the Wal-Mart also differentiated some of its product. They introduced variety of perishable good in their store. They also introduced other food products in the market like organic products (Financial post 2006). Role of Product Differentiation in Competition between Firms Product differentiation have exceptionally significant role in enhancing competition between different competing firms. It regulates the level of competition in the market. Being part of the marketing strategy, product differentiation has an impact in the promotion of the product in the market. The product differentiation has been distinguished to have competition advantages. The companies which adopt products differentiation are always on the upper hand in any competitive market. Companies which rely on the product differentiation apply intense promotion and advertising strategies to demonstrate the uniqueness of their product to the prospective customer. Product differentiation also creates a sense of value of the product to the customer. For a product to sell effectively in the market, it has to be valued by the buyer. The company which relies on product differentiation in marketing their product has an advantage in a competitive market over their competitors who uses other promotion mechanism. Frequent promotion of differentiated product increases the popularity of the product to the customer thus increasing the products demand. To counter the Wal-Mart plan to build a supercenter, the Loblaw Company ensured its initiative of building RCSS was made public. The company consistent promotion and advertising of the RCSS and the brands in the building increased the number of customers who were willing to shop in the RCSS. The effort of differentiating their products gave them a marketing advantage over their competitors (Baumol, 2009, p.894). Product differentiation reduces direct competition among competing firms. Product promotion complicates the categorization of the product in the market hence reducing the comparison of the products produced by different competitors. Product differentiation as a result brings different distinct variety in the market thus reducing chances of direct competition. The presence of different variety of products in the market reduces competition based on the products price to competition based on other factors such as promotion variables, quality and the distribution factors. The application of product differentiation by Loblaw Company reduced direct competition between the company and Wal-Mart. The Loblaw came up with different product in the market which was different from those produced by Wal-Mart. The Loblaw Company did not trim down the prices of their product to fit in the market rather it introduced new products in the market. They also improved product distribution mechanism (Perloff 2004, p. 234). Conclusion Various academic discourses involving entry barriers have been suppressed by multiple terminologies that rarely give a clue on the entry issues that are practical and faced by courts and enforcing agencies (Tunit and Ofek, 2000, p.576). The existing barriers to entry craft definitions have obscured partially significant questions addressing barriers to entry such as how effective is the strategy, how long can the strategy last among others. The barrier to entry strategies should be in a position to delay or prevent entry from curing anticompetitive impacts (Barriers to Entry, 2005, p.53) Barrier to entry concept is significant in various competition policy aspects. Entry barriers should not aim at preventing firms from forever entering into the market for purposes of affecting consumer welfare and competition. Just retarding the new firms’ arrival is enough. For purposes of Wal-Mart and Loblaw to deter entry into their market niche they should utilize the following porter’s strategies. The strategies are such as, product differentiation, cost leadership and focus. In addition to that, the two companies should identify a certain segment in which they can cater for their needs perfectly than other competitors. The Loblaw company management can be termed as one of the most efficient in its marketing strategy. To ensure the company maximizes its profit and meet its customer’s expectation, the company management introduced very triumphant marketing and promotion strategies. As compared to their closest competitors (The Wal-Mart), the Loblaw company was extremely effectual in addressing the entry and exit barriers. It has very proficient strategies to deter entry. In its effort to venture in the new market, the company used all means to publicize their RCSS initiative. Their competitor was not competent enough in its promotion strategy. Product differentiation was another incredibly effective strategy applied by Loblaw Company in countering their competitor. It reduced direct competition in the market as well as enhancing high profit in their operations. Bibliography Ian A. 2007, “Loblaw face down market threat from Walmart” New York, NY: The New York Hork times. Retrieved on 29 April 2012 From http://www.canada.com/nationalpost/financialpost/story.html?id=e81f1f02-76d3-4537-8229-c61b088f79e5 Aghion, P, Nick, B, Richard, l, Rachel G and Peter, H 2005, Competition and Innovation: An Inverted-U Relationship. Quarterly Journal of Economics, Vol.120, no.2, pp.701–728. Barriers to Entry 2005, OECD round tables. Journal of Marketing, pp.1-58. Baumol, J. 2009, “Entrepreneurship: Productive, Unproductive, and Destructive.” Journal of Political Economy 98, 1,893–921. Browning, K., and Mark A 2003, “Microeconomics: Theory and Applications”, Hoboken, N.J.: John Wiley & Sons. 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