: Whole Foods Market Essay

[pic] Business Policy and Strategic Management Spring 2009 Team C TABLE OF CONTENTS Section 1: Case Study of Whole Foods1 1. 1 Historical Background1 1. 2 Organization Mission1 1. 3 The External Environment2 1. 3. 1 Remote Environment2 1. 3. 2 Industry Environment3 1. 3. 3 Operating Environment3 1. 4 The Internal Environment4 1. 5 Generic Strategy4 1. 6 Long-Term Objectives5 1. 7 Grand Strategies6 1. 8 Short-Term Objectives6 1. 9 Functional Tactics7 1. 10 Strategy Execution Policies8 1. 11 Executive Bonus Compensation Plans8 1. 12 Organizational Structure, Culture, and Leadership9 1. 13 Strategic Control10 . 14 Innovation10 Section 2: Identification of Key Strategic Issues for Whole Foods11 Section 3: Analysis and Evaluation of Whole Foods12 3. 1 The External Environment12 3. 2 Industry Analysis12 3. 3 Internal Analysis14 3. 3. 1 Resource-Based View14 3. 3. 2 Value Chain Analysis15 3. 4 SWOT Analysis16 3. 5 Mission Statement Analysis16 3. 6 Generic Strategy Analysis17 3. 7 Long-Term Objectives Analysis19 3. 8 Grand Strategy Analysis20 3. 9 Short-Term Objectives Analysis21 3. 10 Functional Tactics Analysis22 3. 11 Strategy Execution Analysis23 3. 12 Executive Bonus Compensation Plans Analysis23 3. 3 Organizational Structure, Culture, and Leadership Analysis24 3. 14 Strategic Control Analysis25 3. 15 Innovation and Entrepreneurship Analysis25 Section 4: Recommendations27 4. 1 Major Insights of External Analysis27 4. 1. 1 Remote Environment27 4. 1. 2 Industry Environment28 4. 1. 3 Operating Environment29 4. 2 Major Insights of Internal Analysis30 4. 3 Mission Statement30 4. 4 Generic Strategy31 4. 5 Long Term Objectives32 4. 6 Grand Strategies32 4. 7 Short Term Objectives34 4. 8 Executive Compensation35 4. 9 Effective Strategy Implementation36 4. 10 Control Recommendations37 4. 10. 1 Premise Control37 4. 10. 2 Strategic Surveillance37 . 10. 3 Special Alert Control37 4. 10. 4 Implementation Control37 Appendix A39 Appendix B41 Appendix C43 Appendix D47 Appendix E48 Appendix F52 Appendix G53 Appendix H56 WORKS CITED1 Section 1: Case Study of Whole Foods 1. 1 Historical Background Whole Foods started in 1980 with one small store in Austin, Texas. At the time, there were less than half a dozen natural food supermarkets in the United States. [1] Today, they are the world’s leader in natural and organic foods, with more than 270 stores in North America and the United Kingdom. Whole Foods was founded by John Mackey, Renee Lawson Hardy, Craig Weller, and Mark Skiles.

Whole Foods seeks out the finest natural and organic foods available, maintaining the strictest quality standards in the industry. They also have an unshakeable commitment to sustainable agriculture. [2] See Appendix A for a more detailed history. 1. 2 Organization Mission Whole Foods talks about their mission in terms of “Whole Foods – Whole People – Whole Planet. ” Each of these elements plays a dynamic role in the company’s success. [3] For the “Whole Foods” element of their mission, they search for the highest quality, least processed, most flavorful, and most natural foods available.

They believe that food in its most natural state is the best tasting and most nutritious food that there is. [4] The second element of their mission is “Whole People. ” Whole Foods believes that their people make their company. They want their employees to be passionate about healthy food and a healthy planet. Since Whole Foods is a decentralized organization, they want their employees to take advantage of it and use the self-directed team culture to create a respectful workplace where everyone is treated fairly and are motivated to succeed. 5] The third element of their mission is “Whole Planet. ” Whole Foods actively supports organic farming and sustainable agriculture to help protect the planet. Not only does Whole Foods participate on a global level with their Whole Foods Foundation, but they also participate by helping local communities. [6] See Appendix B for more about the Whole Foods Foundation. As a result of the green movement, Whole Foods has added the 3R’s to their green mission: Reduce, Reuse, Recycle. [7] See Appendix C for more about the Whole Foods green movement.

Whole Foods has many important values. For example, they believe that their customers are the most important stakeholders and the lifeblood of their business. [8] Whole Foods has five major stakeholders; John Mackey (CEO), James Sud, Glenda Chamberlain, Walter Robb, and John Elstrott. [9] Whole Foods selectively chose where to do business based on their average customer. Whole Foods knows that its products are for health and food enthusiasts. [10] 1. 3 The External Environment Whole Foods, just like any other retailer right now, has been struggling with the economy.

The external environment has been changing in uphill and downhill motions daily, something that Whole Foods has never experienced before. Not only is there pressure on the financials of the corporation, but also there is the pressure to go green. Whole Foods has to pay close attention to its remote, industry, and operating environments to make sure that they choose the best directions and actions available for its organizational structure and internal processes. 1. 3. 1 Remote Environment The remote environment has recently taken a huge hit for all retailers, including Whole Foods.

Recently there have been many threats in the economy and very few opportunities. The economy, both in the United Kingdom and the United States, has had unstable activity resulting in an increase in unemployment and a decrease in consumer spending. Both of these factors have negatively affected Whole Foods direction, as far as expanding and building new stores. Whole Foods has been keeping up with the changing technology. The organic retailer has been improving the growth of organic foods. Not only has Whole Foods been focused on their technology efforts, but they have also become a leader in ecological efforts.

As a result, they have been the leader in the “green” movement and caring for the ecological environment. They have created the 3R’s “Reduce, Reuse, Recycle” and used it to promote green efforts internationally. 1. 3. 2 Industry Environment The environment that Whole Foods also places a focus on is the industry environment and their product differentiation. Most people can identify a Whole Foods product by its organic information. Whole Foods can easily differentiate their product because they are the leader in selling organic foods.

However, Whole Foods is facing a threat from substitute products and services that is leading to increasing rivalry from established players in the grocery industry. 1. 3. 3 Operating Environment The operating environment is another critical focus for Whole Foods. Whole Foods has done a great deal of research to evaluate their customer profiles. This research has allowed Whole Foods to plan strategic operations and to anticipate changes in the market. Whole Foods knows that its customers are health-conscious people who whole-heartedly enjoy nutritious natural food.

As a result of this, Whole Foods has chosen to operate in the United States, Canada, and the United Kingdom based on each country’s consumer profiles and buyer behavior. Whole Foods has also placed their stores in locations that are meaningful to their organic farming areas and distribution centers. 1. 4 The Internal Environment Employees from top management down have benefited from the company’s rapid growth. Whole Foods does have a strong employee force, with just over 50,000 employees and growing. They are Fortune’s 22nd best company to work for in 2009. 11] A forecast for 2009 quarterly profits has estimated that quarter one of 2009 sales will be down 4 percent. This is the first time in the store’s history that sales will be down. [12] During this, Whole Foods has cut jobs, reduced its store opening plans, pared back its capital expenditure budget, and suspended its cash dividend. [13] Each of the executives within Whole Foods is passionate about the products that Whole Foods sells. They each believe in the “Whole Foods, Whole People, Whole Planet” motto and that motto is followed through middle management all the way down to the last cashier.

See Appendix D for more employee information. 1. 5 Generic Strategy Whole Foods understands the need for cost advantage. They are as efficient as they can possibly be in all aspects of the organization. However, Whole Foods operates under a fairly narrow strategic focus anchored in a differentiation base. They emphasize differentiation in a number of ways. Whole Foods has added a social dimension to its value proposition with its wind energy usage and other environmentally-friendly practices. Social issues are essential to what makes Whole Foods unique in the food retailing industry. 14] This uniqueness allows Whole Foods to differentiate themselves from their competitors. Not only are they offering quality, healthy products, they are a socially-responsible corporation which improves their image in the eyes of the consumer. Unfortunately, the product differentiation they originally experienced has faded as the marketplace changed. Although Whole Foods does an excellent job of differentiating itself from its competitors, its true competitive strategy lies in its fairly narrow focus strategy. Whole Foods has found an excellent place for itself within a particular market segment.

That market segment holds the ethical, educated, affluent, health-conscious consumers in the United States, Canada, and the United Kingdom. Whole Foods is attending to the needs of these consumers, offering healthy, socially-responsible products that are difficult to find elsewhere. Although Whole Foods’ strategy is not completely narrow, as they will sell to anyone that walks in the door, they are definitely strategically targeting a particular group of consumers. 1. 6 Long-Term Objectives In this tough economy, it is more difficult for companies to set long-term bjectives, particularly in regards to financial projections and expansion. However, Whole Foods has made some long-term goals. In the area of competitive position, Whole Foods hopes to continue to expand and grow, aiming to open 66 stores in the next four years. [15] In the area of public responsibility, Whole Foods aims to have over 50 percent of its imported products from the developing world fall under the Whole Trade Guarantee program within ten years. [16] A final long-term objective of Whole Foods, in the area of profitability, is for sales to reach $12 billion in the next five years. 17] 1. 7 Grand Strategies Whole Foods is using a combination of grand strategies to achieve its long-term objectives. Whole Foods has been accomplishing its long-term objective of achieving expansion and growth through a grand strategy of horizontal integration, acquiring similar firms operating at the same stage of the production-marketing chain. This can be seen in Whole Foods’ recent acquisition of Wild Oats. This acquisition eliminated one of Whole Foods’ biggest competitors, which is one of the benefits of this grand strategy.

To attain its objective of having 50 percent of its imported products from developing countries fall under the World Trade Guarantee, Whole Foods is using innovation as a grand strategy. Whole Foods created this guarantee back in 2007, and they are working with third-party certifiers to ensure the criteria are verifiable. Their certifiers, in turn, work with producers to get their products to market and improve their operations. [18] The work their certifiers are doing with producers will help to get more producers matching the criteria under the Whole Trade Guarantee, which will help to increase the number of products in Whole Foods stores.

In order to achieve its objective of achieving sales of $12 billion, Whole Foods is minimizing the number of branded products in their store that can be found elsewhere, using the grand strategy of product development in this instance. Whole Foods launched its Whole Trade product line two years ago, and this product is not available anywhere else. Whole Foods is developing new products in this line, more than doubling their offerings in this line “from 442 products last year to over 1,000 products today. ”[19] 1. 8 Short-Term Objectives

Whole Foods has a number of objectives for the near future. They are determined to introduce eight new stores in 2009. Originally, Whole Foods was operating under the idea that “bigger is better,” as can be seen with their 80,000 square foot store in Austin, Texas. However, they have realized that, in order to maximize return on investment, stores should average around 40,000 square feet. They will try to develop all new stores around this average in the upcoming year. Along those lines, they are also trying to drive down their average development cost per square foot.

In terms of financial objectives for the short-term, Whole Foods is working to stabilize and grow their 2009 sales. They are hoping to put 2009 sales in the range of $8. 3 billion, up from $7. 9 billion in 2008. [20] 1. 9 Functional Tactics There are quite a few things Whole Foods is doing to accomplish its short-term objectives. They are working to obtain a larger return on investment from their developing stores. When originally making plans for their Alameda store in the Bay Area of California, they presented to the community a plan for a 44,000 square foot store, with 100 street-level parking spaces and 80 rooftop spaces.

After reevaluating the potential for return and the current economic environment, they are now planning to develop a 33,000 square foot store with 145 street-level parking spots. [21] In a difficult financial economy, Whole Foods had a difficult time making financial projections for the 2009 year. However, they are certain they will be able to stabilize and grow their sales in 2009 if they can do the following four things: 1. improve their Wild Oats stores, 2. minimize the number of self-cannibalized stores, 3. continue their execution of their differentiation strategy, and 4. ncrease awareness of their value-oriented product offerings. [22] 1. 10 Strategy Execution Policies Whole Foods has created a number of policies to empower and aid in strategy execution. One important policy is their policy of “maximum freedom, minimum governance. ” Whole Foods believes each store should have the freedom to do whatever necessary to serve its individual customers and their needs. Individual stores do comply with best practices, but the only governing rule each store must abide by is that all food sold there must be free from artificial preservatives, colors, flavors, sweeteners, and hydrogenated oils. 23] Another policy that Whole Foods has which empowers employees and counteracts resistance is their “open book” policy. The company shares all financial information, from salaries to profitability, with all of its employees. Whole Foods believes this policy will allow their informed employees to make smarter decisions. [24] Particularly in a tough financial crisis like now, this policy will also counteract resistance to new, more fiscally responsible changes to the organization. 1. 11 Executive Bonus Compensation Plans Whole Foods has an interesting approach to compensating its executives.

CEO John Mackey slashed his own salary from at least one million dollars to one dollar in November 2006. In addition, all of his profit made from stock options in the organization goes to charity. Cash compensation (salary and non-equity bonuses) is capped for top Whole Foods executives at 19 times the average full-time worker’s pay. This is done to eliminate compensation disparities, which damage morale. [25] In regards to bonuses, all employees in the organization have the chance to make cash-based performance bonuses, called gain sharing, and 94 percent of non-executives receive stock options (along with executives). 26] Additionally, employees have the opportunity to vote on what benefits to offer. [27] This model gives employees incentive to perform better when they have something to gain from it. 1. 12 Organizational Structure, Culture, and Leadership Whole Foods uses a divisional organizational structure, which is divided up geographically. Individual regions are responsible for procurement of product, team member training, public relations and marketing activities, and making critical business decisions. Whole Foods decentralizes decision-making in this way for a couple of reasons.

First of all, this model decreases corporate bureaucracy. Also, by making decisions at the regional level, decision-makers are much more knowledgeable about their local shopper than a centralized corporate figure would be. [28] Mackey describes Whole Foods and its culture as a “social system. ” Their culture is founded mostly on teamwork. The team is the defining unit of activity and each store is composed of 10 self-managed teams, such as grocery, produce, etc. Additionally, the team leaders within each store comprise a team, and store leaders in each region form a team as well.

Part of this teamwork contributes to the competitive spirit that exists within stores and between stores, which compete on quality, service, and profitability. [29] This team-based mentality also contributes to Whole Foods’ new team member hiring process. Due to team-based bonuses, existing team members have to vote on new hires. They must receive two-thirds of the vote in order to officially become part of the team. The Whole Foods Leadership Team consists of thirty executives including the CEO, CFO, Presidents and Vice Presidents. Currently, Whole Foods is deciding on a President for the Midwest Region. 30] As discussed earlier, all of these executives believe strongly in the mission and values of Whole Foods. 1. 13 Strategic Control Whole Foods practices a strategic surveillance method of strategic control. They are regularly monitoring events inside and outside the firm, which could affect the course of its strategy. To monitor situations within the firm, Whole Foods practices a process called internal benchmarking. Periodically, each Whole Foods is toured by a group of as many as 40 visitors from another region. This allows for lateral learning, which can be seen as learning from peer stores to determine what they are doing well. 31] This can also help leadership to determine internal and external events effecting business at that store. This can be used to determine possible future trends. 1. 14 Innovation Whole Foods has been incredibly innovative, particularly with their social practices. They were the first supermarket, in January 2008, to eliminate the use of plastic bags in their stores. They also continue to introduce and improve their animal and seafood welfare systems, encouraging innovative animal production practices. [32] A large part of Whole Foods’ competitive advantage is their environmentally-friendly practices.

As they continue to introduce new policies and procedures that improve the environment, they will continue to increase their competitive advantage. Section 2: Identification of Key Strategic Issues for Whole Foods After reviewing a brief case study of Whole Foods, we focused on a few challenges and problems that Whole Foods needs to address. Obviously, a huge concern for any retailer right now, and an equal challenge for Whole Foods, is the current state of the economy. Whole Foods has to watch their internal and external environments closely in response to a decrease in consumer spending and an increase in unemployment rates.

A second challenge that Whole Foods needs to address is expanding their narrow focus strategy. Given the economic downturn, Whole Foods will have to widen their market niche by decreasing prices to reach a lower-income target market. Whole Foods is also struggling with substitute products and services. Whole Foods needs to address the price differences between the substitutes and eliminate the differences. A third problem that Whole Foods is facing is a decrease in their rate of expansion, which is affecting their long-term goals.

In this economy, opening a new store is a risk. Since there has been a decrease in consumer spending, sales have gone down, jobs have been eliminated, and new stores have not been opened. A final problem that Whole Foods is currently facing is their attempt at horizontal integration through their acquisition of Wild Oats. Whole Foods has $925 million in debt that is mostly tied to the Wild Oats purchase. The purchase seemed like a logical short-term and long-term strategy to help eliminate substitute products, services, and competition.

Whole Foods’ current situation has been an uphill and downhill rollercoaster from the acquisition of Wild Oats to the fall in the economy. The following section analyzes these challenges in more depth to determine the root causes of the strategic challenges and problems to help formulate possible solutions for the firm. Section 3: Analysis and Evaluation of Whole Foods 3. 1 The External Environment See Appendix E for in-depth information about Whole Foods’ External Environment. 3. 2 Industry Analysis The boundaries of the industry are Kroger, Safeway, Henry’s, Wegmans, HEB (Here Everything’s Better), and Farmer’s Markets.

The structure of the industry is organic and its direct competitors are Trader Joe’s, Sunflower Market, Sprouts, Kroger, Safeway, and other mainstream grocery chains that offer organic foods. Whole Foods’ major determinants of competition are demographics and location. Whole Foods uses potential customers’ educational levels, population density and income levels as a primary determinant for its locations. Whole Foods stores are mostly located in high-traffic shopping areas and are either free-standing or within strip malls. [33]

Whole Foods’ competitive positioning is their reputation on social and environmental responsibilities, their location, upgrading animal welfare programs, and their effectiveness on sales distribution by supporting local buying from suppliers that share a concern for social responsibility and the environment. This builds many opportunities for the company as a whole. Not only are they strengthening their commitment to local production, but buying local also shortens the time it takes to produce. Hence the local suppliers require less packaging and preserves nutrients and freshness. 34] By buying local not only is the company building a dependable and hopefully long-term relationship with its suppliers, they save on packing and shipping and build a win-win relationship with the farmers. Supporting their community and their people by recycling money within the local economy is a smart approach that represents opportunities for the firm. It is Whole Foods’ competitive positioning that keeps the customers coming back. Not surprisingly, many of its loyal customers believe in Mackey’s philosophy and vision. It is this vision that creates a buyer behavior of its own.

Mackey hopes the firm’s prospective customers are those whose primary concern is not price, but the intrinsic rewards obtainable by purchasing a product that can benefit and affect so many on such a grand scale. Mackey does his homework when it comes to studying and implementing the demographics, psychographics and buying behavior of his customers. It is one of his best strategic approaches. Whole Foods believes their people make the company. Their core values emphasize a happy and empowering working environment where team members are motivated, treated with respect, and are encouraged to discuss and solve problems. 35] 3. 3 Internal Analysis 3. 3. 1 Resource-Based View Whole Foods has a unique combination intangible and tangible assets. They have been able to add new locations and expand to different geographical areas therefore creating tangible assets. The rapid expansion of the company has greatly increased the company’s land and valuable store locations. However, this expansion has perhaps been too rapid and led to the initiative to sell some of the Wild Oats stores and other locations which have been underperforming.

A positive element to the sale of these locations is that it will generate additional cash and financial resources to combat the current lack of available credit and the firm’s recent financial underperformance. Another valuable tangible resource is the increase in the access to and reserves of raw materials Whole Foods has obtained through acquisitions of multiple suppliers and key relationships with organic producers. [36] Whole Foods has many intangible assets which provide competitive advantages for the company.

The company’s reputation for quality products and social responsibility are at the forefront of Whole Foods public image and customers appreciate this reputation. They have built a strong brand name which is identifiable to consumers, and differentiates the company from competitors while promoting loyalty. Organizational morale is also highly important to Whole Foods as the company focuses on motivating and empowering employees. These intangibles of brand loyalty, reputation, and organizational morale are very difficult to imitate and will be sustainable.

The management team is highly experienced and most have been with the company since its inception which is another intangible strength. An important organizational capability of Whole Foods is the company’s unique distribution channels which have been developed as a result of the relationships with supplier and the company’s multiple acquisitions. This capability is unlikely to be imitated due to the isolating mechanism of “path dependent” resources which Whole Foods has obtained through multiple acquisitions and strong relationships with suppliers.

Another capability is the innovative nature with which the company has developed organic products and led the way in social responsibility. The company’s ability to successfully coordinate all decentralized locations is another strong capability that creates value for the organization. 3. 3. 2 Value Chain Analysis The chain of activities creating value for the Whole Foods customer begins with the mission of Whole Food – Whole People – Whole Planet. The activities that strengthen the Whole Foods brand also differentiate the products and meet the customer’s need quickly.

A customer can buy an organic peach at many alternative stores, but purchasing an organic peach at Whole Foods represents getting a whole food while supporting whole people and a whole planet. Now that is value added. The primary activities that represent strengths include outbound logistics, marketing and sales, and service. These activities rely heavily on the support activity of human resource management. As stated in section 1. 2, “Whole Foods believes that their people make their company,” and Whole Foods provides tremendous support for their employees.

Human resource management is seen as a strength and a source of competitive advantage. The primary activities that represent weaknesses include inbound logistics. Inbound logistics is seen as a weakness compared to the larger competitor of Safeway due to Safeway’s buyer power and centralized logistics. The challenge Whole Foods faces is maintaining procurement methods in-line with nurturing a whole planet while lowering costs. As Whole Foods grows, inbound logistics may prove essential to lowering costs. 3. 4 SWOT Analysis Strengths |Weaknesses | |- Reputation as socially and environmentally responsible |- Large debt from Wild Oats Acquisition | |- Focused growth strategy |- Fragmented supply chain | |- Large product portfolio |- Weak international operations | | |- Perceived as “Whole Paycheck” | |Opportunities |Threats | |- Expansion in UK |- Increasing competition | |- Value proposition – Economic recession | |- Advertising |- Maturing organic industry | See Appendix F for Whole Foods’ in-depth SWOT analysis. 3. 5 Mission Statement Analysis As stated in section 1. 2, Whole Foods talks about their mission in terms of Whole Foods – Whole People – Whole Planet. Each of these elements is broadly chosen; however, each one has a deeper meaning for the firm’s intent. A company mission is “the unique purpose that sets a company apart from others of its type and identifies the scope of its operations in product, market, and technology terms. [37] Whole Foods’ mission demonstrates its basic products, food, and services. The mission also demonstrates that the company cares about its internal and external employees and consumers, “Whole People,” as well a long-term goal for the company, “Whole Planet. ” The mission meets six different specific business criteria for a strong mission statement. First, Whole Foods’ product provides benefits at least equal to its price. [38] Whole Foods provides organic food, at an organic price. Second, the product can satisfy a customer’s need of a specific market. [39] As mentioned before, Whole Foods has a specific market that cares about a ‘Whole’ environment, externally and internally.

Third, the advanced technology used in production provides a cost and quality competitive advantage. [40] Whole Foods is and has been implementing wind power in all of the stores. Fourth, the hard work of their employees and support of their consumers provides sustainability and profitability for the company. The “Whole People” motto is carried from the top-down for a strong internal employee bond. Fifth, the management philosophy of Whole Foods results in a favorable public image. The CEO and stakeholders believe in Whole Foods’ “Whole Planet. ” Finally, the CEO’s self-concept of the business is communicated and adopted by their employees and stockholders. 41] Every employee throughout the company follows and believes in the company mission. The six criteria for formulating a strong mission statement are met in Whole Foods’ mission statement. The company mission statement does not need to be reformulated because, once each element is explained, the motive of the company can be seen. The mission statement for Whole Foods represents its intent to survive through growth and profitability from the inside out. 3. 6 Generic Strategy Analysis Although Whole Foods understands the need for cost leadership, they are currently operating under a fairly narrow strategic focus anchored in a differentiation base.

A generic strategy can be defined as a “core idea about how a firm can best compete in the marketplace. ”[42] Both aspects of Whole Foods’ competitive strategy, the narrow focus and differentiation, have worked well to provide the firm with relevant competitive advantage. Part of Whole Foods’ competitive strategy surrounds their differentiation opportunities. Whole Foods possesses all necessary skills and resources that foster differentiation, particularly a creative flare, a corporate reputation for quality, and strong cooperation from all channels. Whole Foods has been creative with revolutionizing the grocery industry and has extremely strong relationships with its suppliers and distributors.

Similarly, Whole Foods possesses organizational requirements necessary to sustain differentiation activities. Its strongest organizational requirement lies in its ability to attract highly skilled creative employees with its better-than-average wages and benefits. Regardless of Whole Foods’ ability to sustain and foster differentiation, as discussed in Section 1. 5, it has lost some of the differentiation it originally experienced as the marketplace has changed which has increased rivalry with Whole Foods. The other strong aspect of Whole Foods’ competitive strategy is their narrow market focus. Whole Foods caters their products to the unique demands of their small- to medium-sized customers, as discussed in Section 1. 5. In the ast, Whole Foods has profited and obtained a strong competitive advantage catering to underappreciated market segments. They have always strategically placed their stores in areas near their target market. However, in this increasingly volatile economy, even those affluent consumers Whole Foods was originally targeting have become more price sensitive. Other firms in the industry, like Kroger or Safeway, that largely target customers, could be Whole Foods’ biggest fear right now. Whole Foods will probably never be able to operate as a true cost leader in the marketplace due to the nature and values of Whole Foods and its products. Whole Foods prides itself on its natural, organic products grown by local farmers.

These products, however, are not designed for ease in manufacturing and Whole Foods does not possess a low-cost distribution system which are both required skills and resources for overall cost leadership. Although they do not possess the resources necessary to attain cost leadership, Whole Foods does understand the need for cost efficiency. They tightly control costs and their incentives are based on meeting quantitative targets, both organizational requirements for cost leadership. Although Whole Foods uses all skills and resources it possesses to foster speed, it does not possess all skills necessary to be a leader in rapid response. Unfortunately, agriculture is extremely inflexible in terms of manufacturing and suffers from low levels of automation.

Whole Foods has developed self-managed work teams at low levels within stores to increase responsiveness. They also quickly provide a wealth of information to all employees within the organization to increase decision speed, which is another way Whole Foods is working to achieve competitive advantage via speed. Although Whole Foods is working to establish advantage in both cost and speed, its true competitive advantage lies in its focus strategy anchored in a differentiation base. As the economy becomes increasingly worse, however, Whole Foods may need to rethink this competitive strategy. 3. 7 Long-Term Objectives Analysis As discussed in Section 1. , Whole Foods possesses long-term objectives in three areas: competitive position, public responsibility, and profitability. Whole Foods’ long-term objective to open 66 stores in the next four years is measurable, motivating, suitable, and understandable, which are all qualities long-term objectives should possess. However, while this objective is specific, it is not very flexible. It is extremely important that long-term objectives be adaptable to extraordinary changes in a firm’s environment. [43] This objective could likely have to be reformulated in coming months or years due to the extreme changes that have occurred economically in the industry’s remote environment.

Whole Foods’ second long-term objective to have 50 percent of its imported products from the developing world under the Whole Trade Guarantee possesses all necessary qualities: it’s flexible, measurable, motivating, suitable, and understandable. It is also being realized, with its consistent work with certifiers to improve this program and get more of their suppliers in developing countries on board. [44] Whole Foods’ final long-term objective, in the area of profitability, suffers from the same problems as their first. Although this objective is measurable, motivating, suitable, and understandable, it did not take into account the necessity for adaptability in case of changes in the firm’s environment.

The current economy could make it extremely difficult for Whole Foods to increase profits by 150 percent in the next five years. This objective is inappropriate considering the current financial crisis and may need to be reformulated in the coming months or years. 3. 8 Grand Strategy Analysis Although two of Whole Foods’ long-term objectives are inappropriate considering the current economy, Whole Foods is using a combination of grand strategies that are geared directly toward achieving these long-term objectives. When analyzing whether or not the grand strategies of horizontal integration, innovation, and product development discussed in Section 1. were appropriate, we found it necessary to utilize the Grand Strategy Selection Matrix. When considering the two variables in the selection process using this matrix[45], we found that Whole Foods possesses a principle purpose of maximizing their strengths. And, although they were focused somewhat externally recently, we believe Whole Foods’ overall emphasis is internal for growth and profitability. Using these variables in the Grand Strategy Selection Matrix indicate that Whole Foods should be using an internal, strength-based combination of grand strategies: concentrated growth, market development, product development, and innovation in order to accomplish its long-term objectives.

Therefore, although Whole Foods was focused on external expansion in recent years using horizontal integration, that strategy may be inappropriate when considering Whole Foods’ overall objectives. Whole Foods’ other grand strategies of innovation and product development are completely appropriate for achieving their long-term objectives. See Appendix G for more information on the Grand Strategy Selection Matrix. 3. 9 Short-Term Objectives Analysis Whole Foods has established two short-term objectives for the near future: introducing eight new stores in 2009 and increasing 2009 sales to $8. 3 billion. An extremely important quality of short-term objectives is measurability, which each of Whole Foods’ are.

Additionally, although they are not prioritized, Whole Foods will be working to introduce new stores all year, which will affect their profitability for the year. Although both objectives possess the necessary qualities, it is important to determine whether they “operationalize” the long-term objectives of Whole Foods. [46] These short-term objectives play into Whole Foods’ long-term objectives, helping Whole Foods to achieve both competitive position and profitability. However, neither of these objectives facilitate Whole Foods with the achievement of their long-term objective relating to public responsibility. Thus, their short-term objectives are not effectively guiding the implementation of the firm’s strategy. 3. 10 Functional Tactics Analysis

Whole Foods will employ several activities to achieve their short-term objectives and establish sustainable competitive advantage. The list of functional tactics utilized by Whole Foods is seen as highly effective. In the functional area of finance, they have recently eliminated 306 positions, lowered the number of new store openings for 2009, terminated 13 leases, downsized 9 leases by 13,000 square feet, cut discretionary expenditures not related to new stores by 50 percent, suspended their cash dividend, and raised $425 million by issuing stock. [47] This quick decisive action to boost liquidity has been highly regarded by the investment community.

The activities in 2008 to improve their Wild Oats stores included converting: “all of the stores to our purchasing and information systems; transitioned team members to our payroll and benefits plans; and eliminated all positions at the Wild Oats corporate office. ”[48] Further action will be taken to expand the perishable offerings, increased rates of pay, and raise the shopping experience to Whole Foods high standards. Minimizing the number of self-cannibalized stores is being achieved through closing the nonperforming operations. Whole Foods differentiation strategy has been copied somewhat in recent years and in response they are rapidly increasing the number of exclusive goods, leading the way in sustainable farming and seafood farming standards, and continuing their Whole Planet actions.

In 2009 they plan to “roll out a 5-Step Animal Welfare Rating system to our U. S. stores,” which debuted in their London store last year. [49] The 5-Step Animal Welfare Rating system is yet another example of Whole Foods ability to distance themselves from the competition. Increasing awareness of the value-oriented product offerings is being marketed through the launch of the Whole Deal program. The program will continue to educate consumers about the ways to save money at Whole Foods through coupons, “budget minded recipes,” and quarterly in store guides. [50] 3. 11 Strategy Execution Analysis The policies that empower action include: “maximum freedom, minimum governance,” and the “open book” policy. 51] “Maximum freedom, minimum governance” is implemented through decentralizing nearly every business function, which has created more freedom of the individual stores and less governance. [52] This policy empowers the individuals in all of the nearly 300 stores to make decisions and take action, including procurement. However, the goal of growing the company to $12 billion in sales is expected to require a more efficient centralized supply chain, which will need to be balanced with the current decentralized policy. The open book policy, which shares all financial information with employees, is effective at informing employees to make smarter decisions. Whole Foods also has a company-wide best practices policy that reduces ambiguity and uncertainty. 3. 12 Executive Bonus Compensation Plans Analysis

Whole Foods has strived to create a compensation plan that fits their strategic goals and the compensation package offered fits well. Executive pay is capped at 19 times the average full-time worker’s base pay, and the CEO has limited his pay to $1 since 2006, in addition to his stock options going to charity. [53] All teams in the organization can earn gain sharing cash bonuses and 94 percent receive stock options. [54] Employees also vote on the benefits to include in their package. Following their core value of caring about the communities and environment they contributed 5 percent of net after tax profit to charitable causes and have committed $7. 9 million to international microlending programs. 55] Because the compensation plan has excessive pay caps and bonuses are based upon store sales, it is believed that agency problems are largely avoided. 3. 13 Organizational Structure, Culture, and Leadership Analysis Whole Foods has developed an organizational structure designed to support the strong company culture and streamlined leadership. The strategy of having a geographically divisional organizational structure helps to build a stronger culture within each of the individual stores. The independence helps to differentiate each store from the larger company. As a company grows, there is a tendency for employees to become “just a number,” but at Whole Foods the individual stores support the sense of being a valued person.

The independence also builds stronger, more self-sufficient bonds and cuts significant levels of bureaucracy out, helping to streamline leadership. [56] Teams play a major role in the structure of the company. By using teams throughout the organization and having the gain sharing cash bonuses awarded to the best performing teams, a stronger competitive team culture has developed. [57] The competitiveness amongst the different sections of a Whole Foods store can be seen in the high quality of presentation and service delivered. The strategy of organizational division and the structural use of teams have shown to be a good fit with the desired culture of whole people and the competitiveness of the company in the supermarket environment. 3. 14 Strategic Control Analysis

As mentioned in Section 1. 13, Whole Foods uses strategic surveillance as a major form of strategic control. By utilizing a bottom up approach to the strategic surveillance method, improvements, trends, and problems can be seen, implemented, or changed more rapidly than by using a top down approach. The internal benchmarking used by Whole Foods includes periodic tours of all stores by employees from another store or region. By using this first-hand exchange of ideas and information, the individual stores can spot places for improvement and management can keep up to date with the changes. The use of strategic surveillance internally has proven successful.

With the growing competition from copycat stores, Whole Foods may need to begin a program of strategic surveillance externally, in order to stay ahead of the competition. 3. 15 Innovation and Entrepreneurship Analysis Whole Foods continues to blaze the trail forward in many innovative ways, through the extensive creation of foundations, continually raising product standards, and green action. As mentioned in section 1. 14, a large part of Whole Foods competitive advantage comes from their environmentally friendly practices and stewardship. In 2005, they created the Animal Compassion Foundation and Whole Planet Foundation enabling Whole Foods to reach their larger community stakeholders. 58] In 2007-2008, the privately held Animal Compassion Foundation was changed to Global Animal Partnership and changed to a public foundation so a broader community can benefit. [59] In 2009, the Global Animal Partnership will roll out their 5-Step Animal Welfare Rating system in the United States. [60] The Whole Planet Foundation has contributed $11. 4 million to 22,000 micro entrepreneurs and 110,000 individuals in the poor and developing communities that supply the store product. [61] Whole Foods continues to implement higher standards in seafood and animal products. In partnership with the Marine Stewardship Council (MSC), they are the first retailer to offer MSC labeled seafood. 62] In 2008, the World Society for the Protection of Animals ranked Whole Foods the #1 retail grocery by the amount of humanly labeled products per store. Whole Foods has shown a commitment to going green in all aspects of their business including: renewable energy, energy reduction, green construction, reusable grocery bags, composting and recycling. [63] By continuing forcefully in the direction of environmental stewardship innovation, Whole Foods can further differentiate itself and the competition will continue to play catch up. Section 4: Recommendations 4. 1 Major Insights of External Analysis 4. 1. 1 Remote Environment 4. 1. 1. 1 Economic Factors

The recession has caused decreased consumer spending and high unemployment, two major economic factors influencing the external environment. Higher unemployment rates are a major contributor to the decrease in consumer spending which has people shopping at lower cost grocers. Higher food prices are also an economic factor. 4. 1. 1. 2 Social Factors Many companies are making focused efforts to increase philanthropy, and Whole Foods is no exception. Public opinion on social responsibility is increasingly relevant to a company’s reputation. Another social factor is growing health consciousness by consumers and increased focus on the green movement. 4. 1. 1. 3 Political Factors

Along with the new liberal administration comes the potential for higher taxes in the future. The economic stimulus plan incentives and funds will also have an impact on the development of many industries. The increase in the money supply from the bill may also lead to future inflation. FDA Food labeling requirements have been increasing along with regulation by the FTC. 4. 1. 1. 4 Technological Factors The growing popularity of online social networking and blogging has influenced company’s outreach to consumers. Businesses have been taking advantage of technological advancements made in agriculture, distribution systems, and communication technology. 4. 1. 1. 5 Ecological Factors

The nation has been embracing the green movement over the past years and this environmental focus will continue to be important. Eco-efficiency has been crucial for environmental responsibility by companies. Recent developments in renewable energy technology have increased the feasibility of producing and using renewable energy sources. Companies and individuals have increasingly been attempting to reduce their carbon footprint and promote environmental sustainability. 4. 1. 2 Industry Environment 4. 1. 2. 1 Threat of Entry There is a low threat of entry in the organic food industry for new entrants thus it is a weak force. It is very difficult for companies to achieve economies of scale due to the high cost of producing and supplying organic food.

It is also difficult to access strong distribution channels, something Whole Foods has accomplished through multiple acquisitions and mergers with suppliers. 4. 1. 2. 2 Powerful Suppliers Organic food suppliers are not powerful since the majority of suppliers are independent farmers and other relatively small suppliers which are not highly concentrated. Whole Foods is a large company and has been able to exert influence and build a loyal chain of suppliers. These reasons make powerful suppliers a weak force. 4. 1. 2. 3 Powerful Buyers Buyers are powerful for several reasons and are a strong force. Many organic products are standard when held in comparison to other organic products and this presents alternatives to buyers.

Organic products are more expensive than standard grocery products which make switching costs low and this threat of substitution makes buyers powerful. 4. 1. 2. 4 Substitution Substitution is a strong force and threat to organic grocers mostly because of high prices. There is a large availability of lower priced substitute products at traditional grocers. 4. 1. 2. 5 Jockeying for Position Rivalry is high and is a strong force in the organic food industry with major competitors such as Safeway increasing their emphasis on organic products. The natural food industry is expanding within the traditional grocery industry and increasing rivalry among existing market participants. 4. 1. 3 Operating Environment 4. 1. 3. 1 Competitive Position

Whole Foods’ competitive position is strong within the traditional organic food industry based upon its reputation for social responsibility and product quality. However, Whole Foods is losing market share and facing increased pressure from larger grocers increasing their organic product lines and lowering prices. For these reasons Whole Foods competitive position in the overall grocery industry is weak and should be improved upon. 4. 1. 3. 2 Customer Profile Whole Foods customers are aware of the benefits of organic food and are loyal to the Whole Foods brand name. They base their decision more upon the benefits of eating healthy rather than the cost. They are generally well educated and affluent, yet Whole Foods products can appeal to many demographic profiles. 4. 1. 3. 3 Labor

Whole Foods has been able to attract highly capable workers and with the amount of available workers due to high unemployment this will continue. They focus on motivating and empowering employees to maintain a high level of employee morale. They do not allow unions since it wouldn’t support company values of open communication and trust. The threat of unionization poses problems, but these problems haven’t materialized thus far. 4. 1. 3. 4 Creditors Credit markets are tight and these conditions make it difficult for companies to find financing with favorable terms. Whole Foods is struggling with debt used to acquire Wild Oats and has recently issued new equity to pay down the amount of this debt. 4. 1. 3. 5 Suppliers

Whole Foods has developed valuable relationships with loyal suppliers and this has been a competitive advantage for the company. It is important to note that with the threat of future inflation, energy and commodity prices could increase throughout the value chain. 4. 2 Major Insights of Internal Analysis Whole Foods has become successful due to a unique combination of tangible and intangible assets as well as organizational capabilities. They have expanded into different geographical areas, increasing tangible assets of land and buildings. Their rapid expansion has pared recently, yet it has built the tangible assets of the firm and created a competitive advantage within the traditional organic food industry.

The intangible assets of the firm are highly valuable and include the company’s reputation, organizational morale, and experience of top management. These intangibles have greatly increased the company’s competitive advantage and help to maintain a loyal customer base and productive workforce. They are difficult to imitate and will be sustainable in the future. A major organizational capability of the company is access to unique distribution channels obtained through the acquisitions of suppliers and from relationships with organic food producers. These distribution channels are based upon path dependent resources which make them difficult to imitate. The company has been innovative in developing organic products and through social responsibility.

The company is also able to achieve coordination amongst decentralized locations effectively therefore providing another organizational capability. 4. 3 Mission Statement The mission statement and motto of Whole Foods – Whole People – Whole Planet is an excellent summation of the organization’s values and differentiation of its business. The “Whole Foods” aspect of the company’s mission is the continual focus on quality and wholesomeness of the products sold. This is the primary reason that Whole Foods is differentiated in the industry and must remain a core focus of the company. The “Whole People” focus is another important part of the company mission.

Whole Food’s employees are a source of competitive advantage, and by believing in the company values of providing healthy food and supporting the environment, they work to achieve the overall company mission. The emphasis of Whole Foods on being environmentally conscious and supporting ecological initiatives is very important to the company image and reputation. This is accomplished through the “Whole Planet” element of the company mission. All three aspects of the company mission are critical to the success of Whole Foods and should continue to be emphasized. 4. 4 Generic Strategy Our recommendation for the company is to continue to use a focus strategy with a differentiation base.

Whole Foods has been successful largely because their products and company image are successfully differentiated from competitors. By continuing to emphasize product quality and health benefits they will maintain customer loyalty and create value for consumers. They also set themselves apart from competitors by having wholesome values and being socially responsible. This is appealing to many customers and creates loyalty and a positive company reputation and image. Whole Foods must continue to be social pioneers in the industry through support of environmental sustainability and other socially responsible causes to maintain the company image.

They must differentiate their product by convincing new customers of the value of eating organic foods and continually develop unique organic products. A major reason they will be able to continually sustain providing quality organic products is due to the loyalty and relationships with suppliers. Their ability to attract highly skilled, creative employees who share the company’s values has also played a role in differentiation. Whole Foods has primarily focused on a target market of affluent, educated consumers aware of the health benefits of organic products. Our recommendation is to broaden the target market focus to seek out additional customers who will switch from standard grocers to Whole Foods.

This can be accomplished through increased promotion and educating consumers who are unaware to the value of eating organic foods. Whole Foods is well established in many geographic areas in the US, Canada, and UK and can continue to grow the customer base in each location through increased promotion and education. 4. 5 Long Term Objectives 4. 5. 1 Profitability Grow EPS by at least 15% and revenue by at least 12% over the next 5 years. 4. 5. 2 Productivity Increase operating margin to 5% over the next 5 years and continually improve. 4. 5. 3 Competitive Position Gain 5% market share in the traditional grocery industry over the next 5 years. 4. 5. Employee Development Add one full week of training per year for all employees over the next 5 years. 4. 5. 5 Employee Relations Implement an employee feedback system over the next 5 years. 4. 5. 6 Technological Leadership Develop an online networking system for customers over the next 5 years. 4. 5. 7 Public Responsibility Every employee will contribute 8 hours of community service each year for 5 years. See Appendix H for in-depth analysis of objectives. 4. 6 Grand Strategies Our recommendation is for Whole Foods to implement a concentrated growth strategy while also using a market development strategy to increase the targeted area for growth.

Whole Foods has been successful by targeting a narrow target market of educated, wealthy consumers who choose to eat organic foods because of health benefits. They will continue to be successful in this market, yet it is necessary to broaden the target market to increase profitability and competitive position in the future. They can also use product development to broaden the target market to meet additional needs and taste preferences therefore attracting new customers. By targeting consumers who shop at traditional grocers with little awareness of the benefits of an organic diet, Whole Foods will take market share from large competitors. Increasing the customer base will increase profitability through revenue growth.

Whole Foods is the gold standard for organic foods and will be able to convert consumers from standard products to premium organic products through increased promotion and educational awareness. By changing the content of promotion to focus on quality and benefits of organic products Whole Foods will develop new markets through increased differentiation from competitor’s products. They can also appeal to new market segments by developing versions of current organic products to appeal to other taste preferences. This can be accomplished through product development, and utilizing feedback from consumers. They can also develop lower cost versions of current products to appeal to consumers who avoid Whole Foods solely because of costs.

Attracting competitor customers is important to long term growth and competitive position. These two grand strategies are important to achieving the long term objectives previously addressed. Increasing the customer base and attracting competitor’s customers through market development and concentrated growth will increase profitability to the desired rate of annual growth. It will also take the targeted percentage of market share from competitors to improve competitive position. Implementing the technological objectives of increased awareness and promotion through online networking will assist to develop and broadened the market to concentrate growth within.

The long term objective of increased community service will also attract customers due to the enhanced public image in communities where stores are located. Increased focus on employee feedback can potentially identify cost saving opportunities within existing processes, and the savings can be used for increased promotion. Increased employee development through additional training will improve productivity and employee satisfaction which are important to the long term growth and prosperity of Whole Foods. By focusing on broadening the target market and concentrating growth to the newly developed market Whole Foods will achieve and potentially exceed its long term goals. 4. 7 Short Term Objectives |Short Term Obj. Functional Tactics |Metric |Due Date |Accountability | |Improved Profitability | |Fully integrate Wild Oats Stores |Close underperforming stores, Remodel |Sales per square foot within |Quarterly status |Store operations | | |stores as needed, Provide training for|5% of existing stores |reports, 3/31/10 | | | |‘new’ employees | | | | |Reduce supplier turnover, create |Work backward in supply chain to |Average supplier contract |Quarterly status |Purchasing and Distribution | |lasting relationships with |cultivate supplier relationships and |duration increases by 10% |reports, 3/31/10 | | |suppliers |avoid poaching from larger suppliers, | | | | | |Support longer contract terms, help | | | | | |support upplier best practices, | | | | | |Leverage buying power within market | | | | |Reduce costs of 365 branded foods |Support green initiative to reduce |Reduce costs by 2% |Quarterly status |Private label operations | | |packaging, Create economies of scale, | |reports, 3/31/10 | | | |Integrate Wild Oats branded foods | | | | | |under the 365 brand | | | | |Competitive Position | |Become a source for local foods |Use regional buyers to establish |Increase local food sales to |Quarterly status |Regional buyers | | |“mini-stores” within larger stores |1% of sales |reports, 7/1/09 | | |Improve value position |Position 365 brand as low price, |Increase 365 brand sales by |Weekly sales reports |Marketing, Store directors | | |sustainable foods at sustainable |10% above |beginning 6/1/09 | | | |prices | | | | |Short Term Obj. |Functional Tactics |Metric |Due Date |Accountability | |Employee Development | |Increase Product Knowledge |Have each full-time employee become a |Increase product knowledge |Begin program by 10/1/09|Human Resources | | |specialist in a specific department, |scores by 10% | | | | |but devote 20% of their time in other | | | | |departments within the store | | | | |Create 15% Time Share for |Have each full-time employee work at |Increase product knowledge |Begin program by 12/1/09|Human Resources | |corporate employees |the store level for 15% of their work |scores by 10% |